Companies with high American Customer Satisfaction Index (ACSI®) scores typically do very well in the stock market. If one created a portfolio of the top 30-35 ACSI companies in their respective industries each quarter, weighted by customer satisfaction elasticity to customer retention, it would demonstrate something quite extraordinary: A reversal of the law of diminishing returns and the dogma re high risk/high return. Investments in the top ACSI companies have exponentially increasing returns and lower risk.
ACSI vs S&P 500 Cumulative Total Return (2006-04/2023)
Over the period from 2006 through 04/2023, such a portfolio would have generated a cumulative return of 1,498% against the S&P 500 return of 375%. This equates to an annualized return of 17.34% for the ACSI Leaders portfolio, while the S&P 500 produced an annualized return of 9.40% over the same time period. The excess return provided from a portfolio of customer satisfaction leaders can easily be verified using publicly available ACSI data.
ACSI Portfolio vs. Consumer Discretionary & Energy (2021 – 4/2023)
Recently, there have been economic anomalies affecting both the market and the economy. Inflation, in addition to product and labor shortages have led to declining customer satisfaction. Yet, despite high inflation, but due to shortages, consumer demand has exceeded supply in many markets. When demand exceeds supply, customer satisfaction matters less and stock returns on customer satisfaction changed from positive to negative.
Nevertheless, several of the leading ACSI companies have held up reasonably well, but the S&P 500 has become less relevant as a benchmark. Over the past two years, the best performing sectors in the S&P (particularly Energy) are not included in the ACSI. As shown in the graph above, the Energy sector returned +144%, compared to +15% for the S&P!!
The absence of these sectors in the ACSI portfolio accounts for virtually all the ACSI’s reduced returns over the past two years. In 2022, where 100% of ACSI’s relative underperformance to the S&P (-20.96% vs -18.14%) was caused by excluding the Energy sector from consideration. Under these circumstances, a more appropriate benchmark might be the Consumer Discretionary sector (ACSI’s largest sector exposure), which declined by 11% compared to +5% for the ACSI portfolio.
After a period from 2018-2022 where the national ACSI score declined for twelve of thirteen quarters, it has now risen from that low for four consecutive quarters. Despite the rise in national score, 2023 so far has seen a continuation of the unique dynamics of a supply constrained economy, where demand exceeds available supply, leading not only to scarcity, inflation and labor shortages – but weak customer satisfaction levels, as well as a corresponding reduction of its financial returns. During the 2021-2023 (to date) period, the ACSI leaders outperformed their broader sectors in: Financials (+49.6% vs +26.2%), Consumer Staples (+52.9% vs +30.1%), Information Technology (+48.6% vs -36.7%) and Utilities (+32.2% vs +25.2%) – by 23.4%, 22.8%, 11.9% and 7%. A reason for this is that the ACSI portfolio has betas greater than one during up-months, while lower than one in down months. The standard deviation is also higher, but generally due to the upside rather than the downside.
For more information on ACSI as a financial signal, please contact Josh Blechman [email protected].
There is a strong correlation between the aggregate national ACSI and aggregate corporate profit over time. This is not surprising and reflects the economic relevance of the ACSI measurement instrument. The flattening of both ACSI and profits began in 2013. The more recent downturn in customer satisfaction is worrisome. It is often the case that a change in customer satisfaction precedes a change in profitability. Since ACSI is down sharply, chances are that corporate profitability will follow suit. It doesn’t always happen, as was the case in the late 1990s, but the risk is high. Nevertheless, there are countervailing factors: Households now have the means to spend and there is pent-up demand caused by the COVID-19 restrictions. The short-term implications of a “shortage economy” with supply problems and lack of labor availability may also lead to a dampening impact of customer satisfaction.
In 2022, the correlation between ACSI and corporate profits diverged from its typical positive relationship. Customer satisfaction declined while profits increased. This is likely to happen in malfunctioning markets with supply problems for products as well as labor, demand greater than supply and where inflation is, at least in part, caused by collusion and price gauging.