It's Not Surprising That Consumer Confidence Has Plummeted

Includes: DIA, QQQ, SPY
by: Vahan Janjigian, CFA

Things got really ugly for stocks in June. The Dow Jones Industrial Average plunged more than 10%. General Motors hit levels not seen since the 1950s. Financial stocks continued selling off as fears of more writedowns escalated.

Yet some individuals continue to insist that there is so little to worry about. I was half listening to a popular business program on television while putting together this month’s issue of Forbes Growth Investor. The participants were debating about whether or not our economy will go into recession. One perennial optimist said that other than the stock market selling off, he does not really see anything that portends recession.

How’s this for starters: Housing prices are plummeting,oil prices are at record highs,con-sumer confidence is at a 16-year low, the dollar has lost more than half its value against the euro, the unemployment rate jumped half a percentage point in just one month, nonfarm payrolls have fallen for five months in a row, the leading presidential candidate is threatening to raise tax rates, and the Fed can’t do anything to help because inflation is rising. With all this going on, how could anyone honestly believe there is little to worry about? Now I know what they mean about people who wear rose-colored glasses. The sell-off in stocks alone is one of the surest signs that the economy is in recession.

Admittedly, GDP grew 1% in the first quarter. But that was largely because the cheap dollar boosted exports. Besides, not all recessions are defined by negative growth. I believe we are in a recession that began back in December or January. Who knows when the National Bureau of Economic Research will get around to declaring it as such, but there is a good chance the recession will be over by the time it decides to make that call.

Despite this rather pessimistic view of the economy, the stock market is another ball game entirely. Given the strong sell-off in stocks witnessed in June, it is probably too late to sell now. Of course, stocks could indeed go lower in the near term. Yet experience tells us that markets usually sell off in anticipation of recessions, and rally long before recessions end. That is largely the reason why I turned from bearish to bullish on stocks just a few months ago. In hindsight, it would have been better to wait a little longer, but it is impossible to always pick the tops and bottoms. By selling now, you will certainly protect yourself from any further loss. However,you will also take the risk of missing out on a rally when it inevitably occurs. At this juncture,I believe long-term investors would be risking more by being out of the market than by being in it. Another popular debate these days involves oil prices and whether or not they are in a bubble. While I believe supply and demand considerations certainly justify higher prices than we enjoyed just a few short years ago, I am also convinced that things have gotten way out of hand. Oil prices are indeed in a bubble, and the Fed is at least partly to blame for this. We will see the price of oil fall considerably when the Fed and the Treasury Department become serious about protecting the dollar.

Of course, as far as consumers are concerned,it makes no difference to them whether or not there is a bubble. All they know is that they feel like they are being robbed every time they fill up the gas tank. Is it any wonder that consumer confidence has plummeted?