Good News: Consumer Confidence Falls to 26-Year Low

As Saturday's Wall Street Journal reported:

U.S. consumer confidence in April fell to its lowest level since March 1982, according to a report Friday.

The Reuters/University of Michigan consumer-sentiment survey declined to 62.6 in April from 69.5 in March. Nine out of 10 respondents said they believed the economy is now in recession, and many said they expect to use government rebate checks to pay down debt or increase savings. That could keep consumer spending, a main engine of economic growth, sluggish.

What is noteworthy here is that consumer sentiment is a lagging indicator. It shows what has already happened and its effect on the general population's reaction to the past.

The only two times in the last 26 years when this index got near present levels were in early 1982 and late in 1990. Both those periods were times when smart investors bucked the bearish and ubiquitous negative sentiment and bought stocks with abandon.

August 1982 was the final time the DJIA was under 800 [it bottomed at about 765 that month] and 1991 turned out to be a stellar time to own stocks, especially value oriented names.

Consumer confidence, just like the VIX index, [inversely] measures investor discomfort and aversion to risk. In a supply and demand marketplace- when most people want to sell or stay on the sidelines is when you can get the best buys.

Both 1982 and 1990 turned out to be spectacular times to get aggressive. I'm betting that early 2008 will turn out to have been just like that when we look back on this year's miserable first quarter years from now.

Comments

[Egg]

One problem I still see with WallStreet's prevailing belief that the bottom is in, is that historically speaking bear markets end with high inflation and high interest rates.

Both those conditions were present in the 1982 and 1990 periods. Today, not so high of rates (to use an understatement.)

I have a strong feeling that over the next four years, we are going to see much higher interests along with higher inflation, and the Obama/McCain presidency is going to be compared to the Carter admin...and sometime between 2010-2012 will present a better longterm buying oppurtunity. Until then, sell all rallies. Especially stocks that don't have large international exposure.

[babai]

What is different between previous recessions and current is global economy. Previous recessison globalization isn't a major factor. I am not sure if we can apply the same analogy as previous situations. With current price of oil, and by 2015 one estimate tells supply can't meet the demand.

[AmesTiedeman]

What happens when it goes to the lowest since 1936? Now they did not keep this kind of data in 1936, but consumer confidence will get worse.

[robster]

why is it that authors get on this website and use 1 point of historical data and 1 point only to predict a stock market movement, in this case a rally. Ok so the last 2 times consumer confidence was so low the market rally? Why would it be the same this time? What if consumer confidence hasn't bottomed. What about all the other fundamentals that point to a bear market such as...um...lemme think.... a credit squeeze, high inflation, dwindling dollar. This is one sided journalism/blogging whatever you call it.

[JimHawthorne]

Some excellent points raised here; might I add that bear trends do not end simply because we hit historical lows, or simply because stocks look cheap in the light of their historical prices.
Bear trends end because fundamental material conditions in the economy begin to show hope of improvement. In our consumer-debt-driven economy, these would center around mundane things like employment/job creation, consumer confidence as demonstrated by consumer spending, growth in the small-business retail sector, and growth in the transportation sector.
If this bear trend is about to reverse, as the author implies, then it is his job to point out to us exactly what conditions are changing to promote this!
BTW, there are few-to none of us that "bought stocks with abandon" in late 1990 that didn't quickly come to deeply regret it!!!

[Paul Price]

1991 was an incredible year for value oriented stocks.

Markets tend to improve 6 - 9 months ahead of economic data showing actual improvement. If you wait for the 'proof' that things are getting better you will already be well past the best buying point.

I'm not saying we couldn't see lower consumer confidence readings but in 26 years [and many business cycles] it hasn't happened.

The three most expensive words in investing...

"This time is different."


Sir John Templeton said...

"If you wait to see the light at the end of the tunnel---
you've already missed the bottom."

[Jason T]

I think the consumer confidence levels are going to get much worse in the next 2-3 years.

2008 marks the year when we have near full market penetration of cell phones and internet in households. Tech boom done.

2009 marks year when baby boomers move beyond peak spending years (46-50) AND start retiring.. this will slow U.S. economy much.. and rest of world that depends on making stuff for us to buy.

House prices should go back to 2000 price levels.

So how will consumer confidence look then?

And the VIX is now the lowest it's been all year.

We just has a 150+ year old investment bank go bust last month.. people don't think they'll be more of that to come??

[Rhino127]

I think you have to go back further and note that market fell from a top on 12/31/1976 at 1004.65 and did not recover until 1981 on 4/17/1981 only to fall again in 1982 to 784.34 on account of the Savings and Loan collapse which was the bottom before the rally of 1983. The market traded between 800 and 1000 from 1976 to 1982 - that is almost 6 years... I think we need to be prudent in identifying a bottom - my feeling is that we need to revisit the 11700 support before this market can go higher...

[mkreisel]

Bears everywhere, amazing!

[Scared Stiff]

It's also interesting to note that we don't actually have a bear market yet. When was the last time consumer confidence was this low without an actual bear market? It's kind of hard to sell the idea that natural indicators point to a bottom in the market when the federal reserve has suddenly decided that its job is to prevent the market from behaving naturally.

[Paul Price]

The only major indices that didn't meet the 20% official bear market criteria were the DJIA and the Utility Index.

Here are the drops from top to recent lows in most of the major inidices:


Index..............Cyc... High.................% Off at Recent Low

DJIA................14... -18.1%
S & P 500..........1576.06..... -20.2%
NASDAQ............2652... -24.7%
Utilities................ 555.71.......................... -17.1%
Transports..........54... -26.5%
Russell 2000........862.00....... -26.0%
Semis (SOX)........549.39...... -39.5%

[galewhitaker]

This time its different! Never before in history has the price of energy been this high in relation to wages. Thd price of oil is never going lower because demand is skyrocketing and no new fields have come on line in 4 years. Equities are not nearly as valuable with crude at $120.

[Paul Price]

But interest rates are near 50 year lows making stocks worth more.

It's a mixed bag for sure.

[Pangaea]

Interesting discussion. I'll add this to the fodder:

"Historically, the most accurate real-time signal of recession has been consumer confidence," says Ryan Sweet of Moody's Economy.com last week. "This level of confidence is not only consistent with a recession; it is beginning to suggest a severe recession."

[alphameister]

We've definitely had a bear market, and we've definitely seen a very tradeable bottom (well backed by bullish indicators) whether or not it turns out to be THE bottom. I see the consumer being stressed for several years and don't expect stock indices to be making new highs anytime soon. It's a time to be bullish but nimble, and to focus on energy stocks, technology and emerging markets.