Consumers Face a Loss of Confidence

Includes: DIA, QQQ, SPY
by: Zachary Scheidt

Market’s are off sharply Tuesday as investors grapple with numerous economic and political crosswinds. This morning, traders were greeted with a weaker-than-expected Consumer Confidence report. The index dropped to 52.9 in June and the May figure was revised lower to 62.7. According to Bloomberg, this index would need to come in above 90 to truly indicate that the economic rebound was on solid footing.

Reuters blames the weakness on two primary factors. First, the labor market continues to be soft and consumers are concerned with the employment situation. Those who have jobs may very well be choosing not to make discretionary purchases and instead build up a savings account in case their employment situation changes. Obviously those who do not have jobs are even more focused on reining in spending.

The second issue is the European overhang. While most US consumers don’t actually see significant changes in their lifestyle as a direct result of the European uncertainty, the thought of heavily indebted governments defaulting on sovereign debt is very concerning – especially considering the massive debt the US is currently building.

Additional factors include the real estate market which was artificially propped up by stimulus programs but now appears to be under pressure once again. If consumers feel that their home value is declining, they are less likely to make large purchases – especially home repairs or remodel projects because there is less justification that these improvements are an “investment.”

Finally, the declining stock market has a very real effect on sentiment. As consumer see the value of 401(k) holdings, IRA accounts, and traditional investment portfolios decline, it sends a very disturbing negative wealth message.

The end result will likely be contracting multiples on equities and a flight to quality. Pursuing a conservative investment strategy appears to be the best approach for today and holding significant amounts of cash and potentially inverse ETF positions can help to offset losses in traditional investments.