Consumer Sentiment Hits New Low...Finally!

The Internet certainly allows for some great immediate insights and satisfaction.  We got one Tuesday when the Google 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 Tuesday 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 tiptoeing up to the edge of the end of the 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 Tuesday’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.

Comments

[RiskAverseA...:]

Too bad this article's headline did not instead read, "Consumer Sentiment Hits New Low ... No End in Sight!"

2008 Oct 29 11:18 AM

[Smarty_Pants:]

Yet another market analyst who confuses opinion with fact, or simply doesn't want to acknowledge their analysis is mostly opinion.

(paraphrasing) 'if only people would realize that current market levels are too low, we would rally back to the correct levels'

Note to author: If you know that current market levels are 'inappropriately low' then buy some shares and drive them back up to where they belong. You will make obscene profits.

I will continue to idly wait based on my OPINION that market levels will likely continue to move lower for some time to come.

Disclaimer: It is my OPINION that stocks are likely to move lower, not a statement of fact. I may be wrong and you may lose money by relying on my OPINIONs. Proceed at your own risk.

2008 Oct 29 02:45 PM

[Moon Kil Woong:]

Consumer Confidence is just 1 ball in a lot of balls yet to fall. Once they all fall then maybe we will see a real recovery. But by that time, I suspect, a lot of people will be broke including all the dummies who keep getting burned on Dow 9,000 false rallies that keep eroding back down towards 8,000. When we break 8,000 we might see some real capitulation.

I think the drop in the market right now is not oversold. I think it's a fair valuation of how bad the future really looks. Tomorrow if it does to 6,000 then that is a fair valuation. It's called efficient market theory.

2008 Oct 29 11:39 PM