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If you are a market enthusiast, it is safe to assume that you have heard by now that stocks fell 100 points Tuesday and that the culprit for the dive to the downside was the disappointing report from the Conference Board on Consumer Confidence. While we’re guessing that Dave may have a different twist on the day’s market action in tomorrow’s Daily State of the Markets (he said something about there being a vacuum of buyers as traders waited on Bernanke’s testimony), the report did appear to coincide with the quick decline in the major indices Tuesday morning. Thus, the question that we want to ask (and answer) is: Is the big dive in consumer sentiment something to worry about?
To be sure, the report showing a 10.5 point decline in the Consumer Confidence took investors by surprise. After all, analysts had been expecting to see the Confidence Index come in somewhere in the vicinity of 55.0 – so the reading of 46.0 in February, which was lowest reading in 10 months, definitely got people’s attention.
Lynn Franco, Director of The Conference Board Consumer Research Center said, "Consumer Confidence, which had been improving over the past few months, declined sharply in February. Concerns about current business conditions and the job market pushed the Present Situation Index down to its lowest level in 27 years (February 1983). Consumers' short-term outlook also took a turn for the worse, with fewer consumers anticipating an improvement in business conditions and the job market over the next six months. Consumers also remain extremely pessimistic about their income prospects. This combination of earnings and job anxieties is likely to continue to curb spending."
The problem here is that declines in employment and income expectations do not bode well for consumer spending. On the topic of spending, plans to purchase a home remained modest, despite the high degree of affordability seen at the present time while plans to buy a major appliance also ticked up, but only slightly. And then the plans to buy a vehicle fell significantly.
To be honest, none of this sounds very encouraging. With the consumer representing more than two-thirds of the country’s GDP, an 18.5% drop in consumer confidence might lead one to start thinking about a double dip, or worse.
However, investors should keep in mind that the Conference Board’s Consumer Confidence Index is derived from a survey and is not representative of what consumers are actually doing. And given that from mid-January to mid-February, stocks fell precipitously and investors were treated to some very public concerns about Greece and other areas of Europe, there is a very good chance that fear may have crept in during the survey period.
Another thing to consider about the period in question is the fact that the political wrangling in Washington had reached a fever pitch as the market began to decline. The perception was that politics had gotten out of control, which may have led consumers to lose some faith in their lawmakers who seemed more concerned about politicking than about helping the country or creating jobs.
Thus, we would like to offer up the idea that the dour mood seen in the confidence number was in response to the stock market correction and the politicos gone wild. If this theory is correct, a rebound in stock prices and a little effort from our lawmakers on the jobs front should rectify the consumers’ mood.
This is not to say that investors should ignore today’s number. However, given that this report was so significantly different than other data we’ve seen recently, we are suggesting that it might be wise to wait for some confirmation that the consumer has actually gone A.W.O.L. before panicking.
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