Friday, August 14, 2009

Consumer Sentiment Sinks Stock Market

Reuters/University of Michigan Consumer Survey was out this morning, and the stock market quickly headed south at the survey result.

This is a preliminary reading for the month of August, and likely to be revised. Still, the index of confidence fell to 63.2, lowest since March and lower than 66 in July. The economists were predicting the rise, ranging from 64 to 75 (according to Bloomberg; median was 68.5, according to Reuters article below).

(What were they thinking?)

INSTANT VIEW: Consumer sentiment at lowest level since March (8/14/09 Reuters) [emphasis is mine]

"NEW YORK (Reuters) - U.S. consumer confidence fell in early August as a growing number of Americans fretted about their finances even though they expected the broader economy to improve, a survey showed on Friday.

"KEY POINTS: * The Reuters/University of Michigan Surveys of Consumers said its preliminary reading of the index of confidence for August fell to 63.2 from 66.0 in July. This was below economists' median expectation of a reading of 68.5, according to a Reuters poll. * The index of consumer expectations fell to 62.1 in early August, its lowest reading since March and down from 63.2 in July. * "Consumers reported much less favorable assessments of their personal finances even as they were more likely to expect improved conditions in the national economy," the Reuters/University of Michigan Surveys of Consumers said in a statement. * The fewest consumers in the survey's sixty-year history reported improved finances, with many citing job losses, shorter working hours and smaller wage gains, said the survey."

The article continues with comments from the economists and analysts. This is one of them:

"TOM SOWANICK, CHIEF INVESTMENT OFFICER, CLEARBROOK PARTNERS, PRINCETON, NEW JERSEY: It was a much weaker than expected report. I think economists put too much weight on the equity rally to forecast this number. My sense is that it will be revised higher, in part due to the cash for clunker program."

That's my sense, too. The economists thought rising stock markets will make consumer happy. Hmmmm. They are economists, aren't they, and not stock market analysts or traders?

The cash for clunkers program being the sentiment lifter, I don't know about that. The program put more people into more debt.

More than anything, however, the main culprit that soured the consumer confidence and future expectations may be the administration's health care "reform" plan as it is being played out across the country in town hall meetings. When people perceive a huge bureaucracy on top of already huge bureaucracy that would be created with this "reform" which has to be supported by taxpayers, additional tax burden on individuals and businesses in the worst recession since the Great Depression, and clear lack of decency (e.g. Pelosi's "un-American", Reid's "evil-mongers") and leadership, what else would you expect from the consumers other than lower readings on the survey, both now and future? And this health care "reform" bill is just one of many more costly projects by the administration.

The second page of the Reuter's article features more positive comments from the economists, that the pullback in consumer confidence was expected, that nothing goes up in straight line (just like the stock market). My sense is that the stock market will pretty much ignore what's going on on the Main Street. No matter how lousy the consumers continue to feel, the market will continue to be disconnected from that sentiment and the market participants will continue to call the survey like this "a lagging indicator". In that, I agree with the last comment on the Reuter's article:

The data is weighing on the market, but the effect won't last long. There's usually a knee-jerk reaction whenever confidence data comes in weaker than expected, but then the market moves on because the data is transitory. The data doesn't relate all that much to consumer spending, which we've seen shape up pretty well over the back to school season. My bet is the market will soon ignore this. I'm not really concerned about the number. Markets climb a wall of worry, and it looks like we still have a little more wall to climb."

And the disconnect continues.

For today so far (I wouldn't rule out a reversal), Dow Jones Industrial Average is down 138 points (1.48%) to 9259, Nasdaq is down 35 points (1.77%) to 1973, S&P 500 is down 14 points (1.47%) to 997, as of 12:55 PM EST.


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