Consumer Confidence - Was It Really That Good?
It is interesting to watch mainstream analysts, and journalists, grab for headlines to support the bullish rhetoric without actually doing some underlying research. As we discussed in "5 Questions Every Market Bull Should Answer" the drive by the markets higher is not being driven by fundamental improvements but almost solely by the Federal Reserve interventions. Of course, in the famous words of Jerry Seinfeld, "...not that there is nothing wrong with that" as long as you understand the inherent risks with trying to justify your position by grabbing at half-truths to provide "confirmation."
The release of the consumer confidence report yesterday speaks directly to the issue of "confirmation bias." The following is the front page of USA Today for Wednesday, May 29, 2013.
The paper attributes the markets rise to the release of better than expected consumer confidence and housing reports. However, if the journalist had taken just a few minutes to look at an intraday price chart of the S&P 500 index they would have seen that it was not the case.
As you can see in the chart above the market spiked at the open. What drove that spike was the purchase of bonds by the Federal Reserve of $1.25-1.75 billion which injected liquidity into the markets. The consumer confidence report was not released until 30-minutes later.
More importantly, while the markets did finish positive for the day, they actually finished 50% lower than its early morning peak. This is hardly the sign of strength one should be looking for. Had the economic reports been the driver for the rally - stocks should have finished higher than when the report was released.
Consumers - Sort Of Confident
The consumer confidence report was a good report nonetheless with it rising from 69 in April to 76.2 in May. However, there are still some concerns with the report that should be addressed rather than just dismissed.
As has already been established, by USA Today and many others, consumer confidence has reached its highest level of the past 5-years. Unfortunately, that level is still lower than where recessions are normally setting in.
One of the more important components of the consumer confidence survey is the "expectations index" which speaks to consumers outlook. While that component did improve in the most recent survey - it is still at levels lower than where they stood in 2011. Coincidently, there is a very high correlation between the expectations index and the annual percentage change in economic activity. As shown in the chart below economic activity also peaked in early 2011.
One of the primary goals of the Federal Reserve, as noted by Bernanke in 2010, was to inflate asset prices in order to boost consumer confidence. The theory is that by inflating asset prices consumers will feel more confident about their current situation and will boost economic growth by purchasing more goods and services. The chart below shows that the Fed was indeed able to achieve stronger consumer confidence by inflating asset prices.
The problem is that it is not translating into stronger personal consumption. The chart below shows the improvement in consumer confidence as compared to the annual rate of change in real retail sales.
So, while consumer confidence has indeed improved from the recessionary lows - it is has been weak when compared to historical recoveries. This should not be a surprise when one considers the record number of indiviudals on food stamps and disability claims, quality employment remains elusive, businesses remain on the defensive and wage growth stagnant.
Another reason is that while the Fed focuses on inflating asset prices - the stock market "wealth effect" is primarily located at the top end of wage earners. For the rest of "Main Street" there remains a disconnect between their personal financial situation and "Wall Street."
The next few months will be very important for a "revival" from the current "soft patch" in the economic data. The question, however, remains sustainability.
With the Fed already talking about "tapering" their current program, interest rates on the rise and market risk at extremes there seems to be little more that the Fed can do currently. The question is now whether the consumer is really ready to pick up the slack? The problem is that I am not sure that they actually can.