Obama Should Take Note of Market Actions That Impact Confidence

by: David I. Templeton, CFA
No one data set provides the silver bullet in predicting the direction of the stock market. On the other hand, the stock market's direction does impact consumer confidence. The market does matter and the decline so far this year is over 25%. Now I know other factors impact confidence levels, but the wealth effect tends to influence the psychological feelings of consumers.

As the below chart details, consumer confidence tends to lag the stock market by about 2-3 months.

(click to enlarge)

consumer confidence and S&P 500 Index chart March 2009

The importance of this one data set is the President should look at actions that impact confidence in a positive way. A positive tone to the market is one factor that can have a positive impact on confidence.

So what has occurred since January that could be impacting the market in a negative way? I can list a large number of factors, but a few are:
  • unresolved financial industry crisis
  • uncertainty about higher taxes. Increasing the bracket rate is one thing, but the uncertainty about the monetary impact on taxpayers with the phase out of mortgage deduction, phase out of deductibility of charitable contributions, etc.
  • significant increases in government spending on health care
  • cap and trade tax
  • foreign profits tax
Certainly, other factors tend to influence the direction of the stock market as well, but the wealth effect tends to have a significant influence on confidence. The economic challenges that could result from the recently proposed budget are having a large negative impact on this market.

As Jim Cramer noted in his article on his site MainStreet, Cramer Takes on the White House, Frank Rich and Jon Stewart:

When I somewhat obviously and empirically judged that the populist Obama administration is exacerbating the crisis with its budget and policies, as evidenced by the incredible decline in the averages since his inauguration, I was met immediately with condescension and ridicule rather than constructive debate or even just benign dismissal. I said to myself, "What the heck? Are they really that blind to the Great Wealth Destruction they are causing with their decisions to demonize the bankers, raise taxes for the wealthy, advocate draconian cap-and-trade policies and upend the health care system? Do they really believe that only the rich own stocks? What do they think we have our retirement accounts in, CDs? Where did they think that the money saved for college went, our mattresses? Do they think the great middle class banks at the First National Bank of Sealy and only the wealthiest traffic in the Standard & Poor's 500?"

The current administration should take a look at events that have unfolded this year, many policy driven, and reevaluate the timing of these programs before it is too late economically.