At the beginning of his presidency, Barack Obama was urged to take a more upbeat tone by many political observers, including former President William Jefferson Clinton. And, I think the tact worked as small "green shoots" were talked up and had a domino affect on confidence. As I've written many times this year that bump in confidence was mostly in the component that covers the future down the road otherwise known as expectations. But, lately, that component has begun to suffer. Initially, I felt it was a direct correlation to the overall approval ratings of the President, but while those numbers have come down, the pace of the decline is nothing like what's going on with consumer confidence. There is also speculation the drop is a result of the job market, but even there it would seem job destruction isn't matching the destruction of faith. So my question is...
...Why are people losing faith?
I have to believe people must feel the walls are closing in on them. We know businesses and banks are hording money in part due to the great unknowns, and households have been trying to repair their balance sheets. But, why the lack of optimism for the future? This is an American trait first observed by Tocqueville, and more recently expressed by British comedian Ricky Gervais, the creator of the television show "The Office." When asked about the difference between British humor and American humor he noted the latter group was smarter, but then he got to the heart of the matter with several comments about Americans in general, including:
- "More ambitious"
- "More optimistic"
He went onto say he must have been born American because he felt "it will be alright." I think it's a problem when we start to believe it may not be alright. Ironically, even as I've railed against the obvious attempts to change the DNA of this country and make it something its not and something it doesn't want to be, I still feel like it will be alright. That is what the powers that be molding and shaping changes want because it leads to a kind of apathy in many. On the other hand, others are free to anticipate their new role in this nation where everything feels like it's being turned upside down. It's tough to be motivated or have faith when it seems the harder you work the more you owe society and the less you work the more society owes you. The masses are beginning to feel something even if they can't put a finger on it. They don't understand forecasting models or have to anticipate cash flows and earnings like those banks and big businesses, but something is telling them things aren't right.
Of course, consumer sentiment surveys aren't exact economic data, and often what people say they feel and what they actually do don't match. But, there is something to be said about self-fulfilling prophecies. People have to feel better about the future in order for the future to be brighter. Therein lays a serious problem with banks hoarding money, businesses putting off investments and cutting jobs, and consumers falling into a state of depression. It really is a good thing the stock market has rallied because it's really the only thing that's working in the economy. The number of Americans that believe we will recover is shrinking, and I bet the number that wholeheartedly believes the nation will be stronger is even a smaller figure. So, when does this all change? Will it all change? And, I guess the bigger question is what implications does plunging confidence have for investors?
Consumer Confidence Crashes
Yesterday's report from the Conference Board saw the headline confidence number come in at its lowest level since 1983. The headline was 47.7 from 53.4 in the preceding month, while consensus was 54.0. The expectations reading took a dive to 65.7 from 73.3 month over month.
We can't dismiss the trend as out of hand because historically consumer confidence leads market turns and direction. In fact, going back years, the direction of consumer confidence has been an accurate harbinger for the stock market and GDP direction. This is a dicey time for the market where things are becoming tougher. I don't like the way the market is acting, some extreme sell-offs on the slightest disappointment or even hints of speed bumps ahead.
Consumer confidence is limping along weighed down by economic uncertainty and a tidal wave of government spending, wealth redistribution, rules, regulations, and so many other factors that have nothing to do with jobs and prosperity. Americans believe by nature, but they are unsure what to believe these days.
Mortgage applications fell again last week as average 30-year rates held relatively flat at 5.04%. Refinancing activity was much higher back when rates were below 5.0%, which is understandable. Now, refinancing activity is at somewhat "normal levels." Purchases, however, are sinking as well and hit their lowest level since May. It seems natural though that purchase applications would sink seeing as the tax credit for first-time homebuyers is essentially over now with no time for potential buyers to get deals done before the deadline. The latest update from Capitol Hill is that the Democrats have agreed on a tax credit proposal that would extend it through next spring. The updated program would be a 10% tax credit (up to a maximum of $7,250) but would also include buyers who are not first-time homeowners and have higher incomes. Presumably, such a plan would bring purchase activity higher again.
Written by Charles Payne, CEO and Principal Analyst of Wall Street Strategies (wstreet.com) providing independent stock market research to over 30,000 subscribers, in more than 60 countries. Mr. Payne is a regular contributor to the Fox Business and Fox News Networks. For more information about Mr. Payne, please refer to the company’s website www.wstreet.com.