The Internet certainly allows for some great immediate insights and satisfaction. We got one yesterday when the Google (GOOG) Finance site did a great layout job with the market returns shown right next to the most newsworthy headlines. Look closely and you will see in (immediate juxtaposition), the headline that consumer confidence is at an all time low at the exact moment the market (DJIA) closed yesterday up +889.35, the second largest appreciation in the Dow in history!
While the Google heading talks about the Johnson County consumer confidence study, the links just below it relate to the Consumer Confidence Board confidence study. A summation from their site is below, along with the dismal reading of 38.0, which declined from 61.4 just one month earlier. This is a painful decline in confidence, and the third largest drop in the history of the data series.
Well, sometimes life imitates math, and sometimes math imitates life. Most of the time, however, it doesn’t occur in such a brilliant display as one screenshot on the Google Finance page. Just as the consumer confidence gurus declare that the individual consumer is finished, the market rallies intensely.
All joking aside, it is a well followed indicator that a bottom or intense decline in the consumer confidence and sentiment levels will precede a bull market start. Now, one day doesn’t make a rally (although +10.88% is better than a stick in the eye), but these are the types of statistics that need to work through the market psyche before we will be able to sustain an upward drive back to appropriate valuations.
Looking at the statistics historically, the Conference Board’s CCI number has fallen over 34 points before a bull market began in each of the last 5 recessions. This is very telling and can be understood quite readily in a simple way. When the average consumer is drunk with their own buying power (confidence is high, repeat confidence is high), they are tip toeing up to the edge of the end of bull market in stocks. Their confidence is directly related to the long ride up in valuations that have made their portfolio look so good, which feeds their confidence. But like many over-confident politicians can lament, “pride cometh before the fall”. And as we have seen, the fall has been painful and huge.
Value investing groups that consider themselves a bit contrarian by definition, love to see consumer confidence bottoming out. It signals that people are accepting valuations (and their current lot in life) and it is the road back to recovery. Let’s hope yesterday’s linkage between CCI numbers and the day’s rally mark the beginning of a stabilization in the market.
Although, we wouldn’t count on it just yet…
The Conference Board Consumer Confidence Index™ Plummets to an All-Time Low (link)
October 28, 2008
The Conference Board Consumer Confidence Index™, which had improved moderately in September, fell to an all-time low in October. The Index now stands at 38.0 (1985=100), down from 61.4 in September. The Present Situation Index decreased to 41.9 from 61.1 last month. The Expectations Index declined to 35.5 from 61.5 in September.
The Consumer Confidence Survey™ is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS. TNS is the world’s largest custom research company. The cutoff date for October’s preliminary results was October 21st.