Consumer Confidence and Stock Market Investor Sentiment Indicators

By: Richard_Shaw

The broad consumer confidence index reported a decline below the 50% level on July 28. Let’s see how some other dimensions of confidence look.

CONFERENCE BOARD

In addition to reporting the drop in the consumer confidence index below 50%, the Conference Board reported a drop in the present situation index (a number in the 30’s), and a drop in the expectations index (a number in the 60’s).

The present looks bad and worse than recently; and the future looks somewhat positive, but not so much as recently.

Only a minority of CEOs feel the overall economic situation is improved over six months ago (fewer sense improvement in their own industries), however a small majority expect overall economic conditions to improve over the next six months (somewhat less than a majority have improvement expectations for their own industries).

CEOs should be more knowledgeable about their own industries than all industries, so their views of their own industries should probably be more reliable.  The difference between their industry view versus their global view may be an example of hope over reality.

GALLUP

Overall investor optimism about the next twelve months is up considerably from a November 2008 value of negative 47, and the March 2009 low of negative 64, but still poor at negative 3.

Investor optimism about personal portfolios over the next twelve months was a positive 13 in November 2008, a positive 6 in March of 2009, and stands at a positive 28 today.

This is the opposite of the CEO situation.  CEOs see greener grass in other industries, while investors are more confident of their personal portfolios than the aggregate portfolios of their investor brethren.  Is this also hope over reality?

Investors, while having slightly negative to moderately positive views about portfolios, have significantly negative views of the direction of the US economy over the next twelve months.  The economic view was at negative 60 in November 2008, negative 70 in March 2009 and at an improved negative 31 now.

In contrast to the Conference Board Consumer Confidence index which had been above 50 before the last report, the weekly Gallup Poll has shown the percentage of those polled believing the economy is improving at about 20% in January 2008, down toward 10% in July 2008, and back up to just below 20% before the October 2008 market crash.  The number rose from just below 20% in March 2009 to nearly 40% in May and June, but is back down to 34% now.

So the situation is better, but is not good.  That is not a good case for a bull market.

RASMUSSEN REPORTS

On a more global scale and with a longer-term view, Rasmussen finds that 49% of voters believe that the best days for the United States are in the past. Only 38% of voters believe that the best days for the US are in the future.  The remainder are not sure.

These data tend to support the idea of under-weighting the US in asset allocation models and over-weighting countries in the ascendant stage.

Back closer to the present with more a more specific question, 54% of Americans expect interest rates to be higher a year from now, up from 30% in April.

If and when rates rise, bonds will have some difficulty.  Before or as that time begins, it would be a good idea to shorten duration.

Only 25% of Americans believe the Obama stimulus package has aided the economy, and 31% say the stimulus package has hurt the economy, while 36% say the package has had no impact.  Presumably, 8% don’t have an opinion.  Compared to just after passage of the plan, fewer think positively; and about the same percentage think negatively; and more think there is no impact.

At best, the outcome is uncertain.  That is not solidly supportive of equities, and is probably an indication to over-weight bonds.

Not surprisingly, 50% of Republicans feel the plan has hurt the economy, but only 41% of Democrats feel the plan has helped the economy.

Fully 60% of voters oppose a second stimulus plan, while 27% believe a second stimulus plan is warranted.  In contrast, 51% if voters believe an across-the-board tax cut is the best tonic for the economy at this time.

More stimulus spending means more stimulus borrowing and higher taxes than even those contemplated now.  We tend to think that stimulus spending matched to higher taxes is not actually stimulative (basically +1 and -1 = zero).  Overall, we think more government stimulus with higher taxes (plus more government intervention in the business process) is negative for capital formation and investing generally — a long-term negative for growth and profits.

Conclusion:

The favorable stock market expectations and even more favorable personal portfolio expectations don’t seem to line up well with views of the economy, interest rates, taxes and government stimulus plans.

Confidence improvements may warrant a better market, but improvement within negative parameters does not warrant persistently strong markets.

We have gone from a brush with near death to very sick, but are not yet healthy.

This is no time to become giddy, over committed or complacent.  Stay alert and use protective stops.

By Richard Shaw 
http://www.qvmgroup.com

Richard Shaw leads the QVM team as President of QVM Group. Richard has extensive investment industry experience including serving on the board of directors of two large investment management companies, including Aberdeen Asset Management (listed London Stock Exchange) and as a charter investor and director of Lending Tree ( download short professional profile ). He provides portfolio design and management services to individual and corporate clients. He also edits the QVM investment blog. His writings are generally republished by SeekingAlpha and Reuters and are linked to sites such as Kiplinger and Yahoo Finance and other sites. He is a 1970 graduate of Dartmouth College.

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