Categorized | Featured, Markets

Consumer Confidence Pressures Rebound

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Yesterday, the market dealt a disturbing blow to frustrated bulls who were riding the recent rebound in equities.  Before the market opened, futures were a bit weak after a report showed German business sentiment was not as strong as expected.  (Remember, Germany is one of the primary countries which is expected to be responsible for bailing out Greece).  But while the pre-market futures were relatively tame, the market quickly turned lower after the US consumer confidence numbers were released at 10:00 AM EST.

Economists were surprised to see the confidence index drop to 46 which is the lowest reading since 2009.  At issue was the continued absence of employment recovery and a frustratingly lower reading in the “future expectations” category.  It seems that while the market has been pricing in a robust recovery, the average American is not quite assured.  Since consumer spending is a major part of our economy, weakness in consumer confidence is particularly troubling.

Fed laid groundwork for tightening last week

Fed laid groundwork for tightening last week

Weak confidence calls into question the stealth rate increase which the Fed undertook late last week.  The Fed is walking a delicate tightrope between loose policy which could quickly lead to excessive inflation, and tight policy which could cut off growth in our fragile economy.  Raising the discount rate last week signaled that the Fed was ready to begin tightening, which could have widespread implications on the economy.  One of the more disturbing results could be an increase in mortgage rates charged by refinance companies which would increase the difficulty of home refinancing for many borrowers.

As adjustable rate mortgages reset (at potentially much higher levels) this could not only reduce the amount of discretionary spending available to many consumers, but it could also cause another wave of losses for banks and mortgage lenders.  Such a crisis could have ripple effects including continued restraint in lending to small businesses which in turn could be unable (or unwilling) to increase hiring in the face of uncertainty.  Not to sound like a broken record, but it appears the dominoes are stacked and the consumer confidence report may have been one of the first to fall – setting off a chain reaction and leading to lower market prices.

Lower prices and a difficult economy does not mean that we as investors need to be resigned to suffer losses.  There are plenty of opportunities to use this scenario to our advantage including purchases of companies that will thrive in this environment as well as owning ETFs that trade inversely to market trends.  One example of an industry that should do well in a poor consumer environment is the payday loan / pawn shop industry.  ZachStocks has discussed a potential investment in First Cash Financial which should see its business pick up as consumers look for non-traditional financing options.

Inverse ETFs are also a helpful tool to offset losses in more traditional growth investments.  New products are quickly being rolled out that allow investors to bet against individual sectors, commodities, or geographic regions.  If you have significant exposure to energy companies, you might consider taking a position in the ProShares Ultrashort Oil and Gas (DUG) which will increase as this sector declines.  The beauty of these instruments is that they can usually be traded in an IRA (which typically would not be able to short securities) and offer an excellent hedging opportunity.

Other Articles of Interest
Recovering Editor, Deteriorating Markets
Leveraged ETFs – Meet Leveraged Mutual Funds
24/7 WallSt: Back to Future With Consumer Confidence
Intelligent Speculator: Time to Be a Contrarian?

Before investing in any vehicle, make sure you understand the risks and potential rewards.  This is true for both traditional growth stock positions as well as less traditional positions that allow you to hedge your exposure.  If you are worried about potential losses associated with declining consumer confidence and the potential for more economic and market volatility, then please visit Sound Counsel Investment Advisers and allow us to help you navigate the turbulence.  Potential for market losses are significant, but sound investors should be able to use discipline and many available tools to keep their capital intact and even benefit from what may very well be a sustained downtrend.

FD: Author does not have a position in any stocks mentioned in this article.

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Consumer Confidence Pressures Rebound

8 Comments For This Post

  1. IntelligentSpeculator Says:

    Thanks for the link Zach!

  2. bbro Says:

    According to Ned Davis Research…whenever the Consumer Confidence Index has been below 66 the S&P 500 has gained 20%
    per annum …..this condition has occured 12% of the time over the last
    40 years….

  3. BUZZER Says:

    That’s a bit ambiguous since “whenever” implies every time or 100%; so what 12% occurrence refer to?

  4. Econdoc Says:

    Focus on earnings and what consumers and businesses DO – not how they FEEL.

    Earnings, Dividends. That is what drives returns to Capital. Consumer Feelings are not critical – you could almost say that the negatie sentiment is good as it puts a real dampener on inflationary expectations and wage pressures.

  5. bbro Says:

    You are right…I wish I could just send the chart…anyway the point is l guess when the Consumer Confidence is below 66 it has been in the past a good buy….

  6. econdoc Says:

    People need to use commonsense

    In October 1962 the S&P was 62. The planet was on the brink of annihilation. Does anyone believe consumers felt good? What was the confidence reading of people sitting in bunkers?

    It just does not matter. A number like this – like a lot of them in the scheme of things it is noise. Pure and simple.

    In 50 years the market is from 60 to 1100. That’s 18 times! And this at the tale end of Great Recession 2. People need to get a grip.

    If you are retired or just about to retire say in the next 5 years – the last 18 months has been a disaster – if you were overexposed in equities you should be kicking yor advisot. I really feel for those people. It has made me think about an Immediate Annuity when the time finally comes. But for everyone else – this is nothing. In 10 years it will be a tiny little bump. In 20 years it will be tough to remember.


  7. BUZZER Says:

    A 60 year old retiring in 5 years should not be thinking annuity because there’s a reasonable probability that he/she will live another 25 to 30 years; therefore equities should still remain a portion of a diversified portfolio.

  8. econdoc Says:

    you can wind up in the loony bin if you worry about every single number – too much noise

    every forest has a few dead trees in it – its the forest that matters


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