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SENTIMENT UP, STOCKS DOWN By WSS Research Team

By Carlos Guillen

Equity markets have been trending lower so far during this first half of the trading session, as sentiment data failed to meet expectations and as the better than expected GDP growth was mostly the result of defense spending, which may not reoccur.

One disappointing item today was that consumer sentiment landed worse than expected. The University of Michigan Consumer Sentiment October final result landed at 82.6, which was lower than the Street's expectation of 83.1 and lower than the initial estimate of 83.1; however, the result did represent the highest reading since September 2007 and was over a four point increase from the 78.3 level reached in the prior month. Quite surprisingly, consumers are finding their current financial positions to be improving, as an increasing number of households reported recent income gains. Then again, about half of consumers saw their finances decline.

Also surprising was that consumers' outlook for employment, the economy, and their personal finances climbed to the highest level since February 2007. The expectations index increased to 79.0 from 73.5, landing a bit lower than the prior estimate of 79.5. Consumers currently see improved prospects for the national economy, but more interestingly, they see a significant improvement to the jobs market during the year ahead, as this month consumers express the most favorable outlook for the unemployment rate since 1984. In terms of their personal income, consumers expect the largest income gains since November 2008. Quite ironically, while there seems to be quite a bit of optimism going on, the expected gain was still small, at just under one percent. Moreover, given the anticipated inflation rate, most consumers still expected no increase in their inflation-adjusted incomes.

As mentioned earlier, GDP growth for the third quarter clocked in at 2 percent, a bit higher than the Street's estimate of 1.9 percent. However, the beat was as a result of an unexpected increase in Government spending that jumped by 9.6 percent, which in turn was affected by a 13 percent increase in defense spending. It should also be noted that Government spending had been trending lower, declining during the prior four quarters, so the sudden change came out of left field, but will likely not be sustained in the longer term.

In all, the economic data posted today has not been able to stop stocks from sinking lower. Despite the better than expected GDP growth result, no one believes this level will be sustainable for the short term. Moreover, while it is certainly encouraging to see consumers more confident about the short term future, it is difficult to see this feeling continuing much longer as consumers will soon be reminded of the uncertainty in fiscal policies. We believe the uncertainty of changes in taxes and government spending is still a reality that consumers will soon be facing, and this will likely change consumers' perception.

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