These aren’t your father’s financial markets. Information, as it has with everything else in the world, is changing the face of finance forever. The power of the consumer has never been more apparent than during the recent economic downturn. During the holiday season, consumer confidence and spending will be analyzed as never before, as analysts attempt to figure out whether our current market recovery is genuine or smoke and mirrors.
As a result of being under the microscope, consumer sentiment will either be a major driver or frustrating roadblock for recovery. The most recent market recovery has been optimistic at best and irrational at worst. A double dip recession is possible, and there will almost certainly be a double dip unemployment trend. Regardless of your opinion about those two conclusions, consumer sentiment will play a major role in the trend lines that have become so important to us. We’ll start with some numbers.
The good news about consumer confidence this summer has been replaced with a negative trend in since:
The most recent data from the University of Michigan Consumer Sentiment survey indicates that CI fell in October after going up in September. Two weeks ago, information was released that consumer spending is down 23% from the same week one year ago. This could indicate even lower CI as the Holiday season approaches. According to GALLUP, weekly spending fell from $76 on October 18th to $62 on November 15th. If this path continues, the holiday season could instigate a dip in confidence and delay the recovery even further. The numbers have rebounded very recently. As of today, the moving three day weekly spending average was $81 and consumer spending was down 7% year on year, which was the smallest decline yoy of 2009. Thanks for the clarification, consumers; now it is really impossible to tell what is going on.
Even if we could get a grasp on these seemingly contradictory numbers, why does it matter what investors think? Isn’t the economy independent of the stock market in many ways? The answer to that is yes and no. Although the economy and stock market are two different vehicles, they are very closely related to one another. The more confident consumers are, the more they will invest in the markets and the more they will consume as households. The more is consumed, the better earnings will be and the more confident investors will become. In many ways, one is dependent on the other, but in order for a recovery to genuinely begin either consumer confidence must go up or earnings must recover.
The frustrating thing is, if everyone would simultaneously become confident and begin to spend, the recovery would actually begin to grow legs. As it is, the legs of the recovery were built with stimulus and incentive plans by the United States government, of which there is not much left to give. The trust inherent in the way that our markets operate rely on the renewed confidence of the investor to pull the dusty box out from under his bed and take those gold coins down to the stock market. Until that happens we will see mixed signals from the economy and possibly another slight downturn before things heat up.
