With the consumer sector accounting for roughly 70 per cent of the U.S. economy, there is an intuitive sense that a consumer recovery is vital to the sustainability of the recovery in both the U.S. economy and the stock market.

That’s why the U.S. Conference Board’s latest reading on its monthly consumer confidence index, released this week, was a mixed blessing.

On the one hand, the index is starting to build a positive trend – now with three straight months of increases.

On the other hand, the numbers are a reminder of just how big the gap has become between the recovery in the stock market and the still very fragile U.S. consumer.

STOCKS v. CONSUMERS

In general, consumer confidence and the U.S. stock market follow similar trajectories – and the movements of the two certainly tracked each other closely during the depths of the financial crisis and early recovery.

But as the accompanying chart shows, the two have diverged over the past eight months. While stocks have continued to rally, consumer confidence has largely stalled – at barely half the levels seen before the credit crunch first surfaced in mid-2007.

While it’s a bit of a stretch to entirely equate consumer sentiment and stock-market behaviour, there’s no disputing that consumers play a significant role in the equity market – both as investors and as drivers of sales at the companies that populate that market. If stocks have shot up without the underlying support of consumers, one has to question whether stocks haven’t gotten well ahead of themselves.

INVESTOR SENTIMENT AND THE HOUSING DIP

If we look past consumer confidence and focus on investor confidence – which encompasses institutional as well as retail sentiment – we see that there, too, cracks are visible. And some of those cracks, curiously, may be coming from the U.S. housing market.

The State Street investor confidence index, which also came out this week, showed a flat reading for December, after the index fell sharply in autumn. The drop-off foreshadowed a similar sharp reversal of fortune in the housing market, where numerous indicators have suddenly reversed their 2009 second-half upturn.

The link between investor confidence and housing-sector strength may not be an obvious one. But it does make sense: Both are closely associated with credit availability and wealth generation.

With consumer and small-business credit remaining stubbornly elusive, and still-weak labour and housing markets keeping a lid on household wealth growth, investor sentiment may be already hinting at something the stock market hasn’t yet absorbed – that investment dollars may be harder to come by this year than previously hoped.