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Consumer
Confidence Is "Still Weak"? A Media Reality Check |
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It's
amazing how presumptuous the media can be sometimes. Oh, that's not to
say they should never fill in the blanks or paint a bigger picture
when it's needed - investors and resources such as this website have to
do the same sometimes. On occasion though, the assumptions are not only
off-base, they're downright misleading.
 A
reminder of this reality came yesterday in the shadow of new consumer confidence
numbers. The Conference Board's primary optimism measure scored a 52.9
for December, versus 50.6 in November. December's reading was slightly
better than the expected score of 52.0.
No big deal
- the consumer confidence reading has been headed higher for a while now;
six of the last ten scores have been higher than the prior month's reading,
and we're miles above the low score of 25.3 from February. In other
words, December's slightly higher score was no real surprise.
What was odd
to the point of misguided was an AP story that followed the release of
the consumer confidence figure. Between the headline 'Consumer
confidence rises in Dec, but still weak' and the line (from the
story) "but still far short of the 90 that would signify a solid economy",
investors reading the story may be alarmed.
That's not to
say either statement was untrue. In fact, both are essentially accurate.
The
shortcoming is the assumption that how people say they feel right now dictates
how they act in the near future. Trust us - they don't. We don't
even have to go back that far to find a clear example.
Rewind to February
of this year. The same consumer confidence reading discussed above came
in at a multi-year low of 25.3. And, with housing prices still in a freefall,
credit all but nonexistent, and stimulus money still not being doled out
by that point, investors (and the media) were sure things could
only
get worse.
Since then,
the market has gained more than 50%. Clearly consumers/investors changed
their mind about things in a hurry... and this was coming off a multi-year
low in consumer confidence.
Point being,
if consumer confidence at 52.0 is 'still weak', then a reading of only
25.3 is also - by default - still weak. Yet, stocks have made huge
gains on legitimate improvements in earnings since then. Could the assumption
be wrong again now?
The lesson
learned? Investors who wait for the 'solid economy' evidenced by a
confidence reading of 90 or higher run a tremendous risk of missing
out on big gains. The story didn't deny that confidence lags economic recoveries.
In fact, it made it pretty clear that there is a lag. The story
just didn't add enough historical context. So, here's the rest of the story...
from an investor's point of view.
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Historical
Consumer Confidence Versus Stocks |
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Per the story's
author, the Conference Board's consumer confidence reading should score
above 90 to suggest we're enjoying a 'solid economy'. Fair enough, but
let's look at how stocks performed when confidence came in under that benchmark
level.
 Since
the 70's, we've seen four sustained periods where consumer confidence was
under 90. In all three prior cases, the stock market ended that period
higher than where it started. The jury's still out on the fourth one,
as we're still in the middle of it.
To be fair,
the economy isn't the market, and the market isn't the economy. So theoretically,
the economy could have been technically weak during those low confidence
periods, while stocks were making gains anyway. Considering the market
and economy are at least reasonably inter-connected though (stocks lead
the economy), and that these low-confidence periods lasted for years,
it's tough to say that sub-90 readings are actually an economic barometer.
Moreover, investors interpreting it as such would have lost out on substantial
gains.
Even more interesting
is how consumer confidence fared during the 2000/2002 bear market. With
the exception of the two months following the 9/11 terrorist attacks, consumer
confidence never came in under 90 during that time. Yet, we know
the
economy was weak then.... and we know stocks were falling sharply
then as well. So, confidence readings above 90 meant nothing positive
during this time. Ironically, consumer confidence didn't dip below 90 until
the recovery was already underway in late 2002.
 A
close-up chart of consumer confidence and the S&P 500 is nearby, but
if you want a long-term detailed chart of the same, click
here. It's a real eye-opener.
Needless to
say, arbitrarily assuming confidence readings above 90 is an indication
of economic strength is errant - there is no measurable correlation
that suggests this.
The irony?
Despite the 'still weak' message being sent out by the AP article, there's
actually some verifiable evidence that jumping into stocks while confidence
measures are under 55 - as they are now - is actually a great way
to tap into the market's cyclical nature and scoop up stocks at
bargain prices.
That's a key
detail the story left out. To see it for yourself though, the chart of
those sub-55 confidence readings is nearby. Each instance is marked with
a blue 'up' arrow. For a longer-term, larger chart of the same, click
here.
Though it may
not seem this way, our goal wasn't to bash the AP or the author of the
article in question. Our goal was to once again remind our readers to assume
nothing, and verify everything.
The logic behind
the story's statements makes sense at first glance. As we all should
know by now though, the market rarely behaves in a rational, logical
manner. Waiting for 'proof' of a strong economy could mean wasted time
or wasted opportunity... a rising stock is rising stock, whether the economy
is strong, weak, or in transition.
As for how we
would have handled the announcement from the Conference Board, we've talked
about it before. More than anything else, the direction of the consumer
confidence trend - regardless of the level - is the direction
stocks are generally pointed. Where did the interpretation come
from? That's been the most effective (profitable) way to use the data
after looking at it from dozens of perspectives.... and even then
there are exceptions.
Right now, the
trend for this monthly data is pointed upward. We're bullish as a result.
Don't overthink it.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
