Customer Satisfaction and the 2013 Stock Market Anomaly

The idea that customer satisfaction doesn’t matter, or that poor customer service is a road map to stock market success, is the stuff that satire is made of. Just ask Stephen Colbert.

A recent article in Bloomberg Businessweek suggests that customer satisfaction has no relevance to stock price. Thirteen years of ACSI data suggest otherwise, as shown by the historically positive relationship customer satisfaction has had with stock price. There are good reasons why satisfaction matters. Common sense dictates it is better to have satisfied loyal customers than to have dissatisfied defecting customers.

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Source: S&P 500 from Standard & Poor’s at http://finance.yahoo.com

That said, for 2013 (and for 2013 only), it is correct that the worst companies in the ACSI have beaten the best ACSI companies in terms of stock returns. This anomaly is due to the fact that investors have favored low-priced stocks (which have performed poorly in the past) over high-quality stocks (which are, appropriately, priced higher). In that sense, what we have is a junk rally.

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Source: S&P 500 from Standard & Poor’s at http://finance.yahoo.com

The junk rally phenomenon is explained in another Bloomberg Research piece, “Junk Glistens Under ‘Bernankecare’ as Worst Stocks Win.” According to the article, the Federal Reserve’s near‐zero interest rates, combined with asset purchases exceeding $3 trillion, are “causing parts of the market to behave strangely. Stocks of companies with weak balance sheets are rising twice as fast as stronger ones; junk borrowers get rates lower than their investment‐grade counterparts did before the credit crisis; and initial public offerings are doubling on their first day of trading.”

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Some investment experts foresee trouble when the market comes to its senses. This may not be the “irrational exuberance” the market experienced during the dot‐com bubble of the late 1990s, but cheap money and a year‐long stock market rally where investors are looking for cheaper buys are trumping the fundamentals…for now.