Imperfect Pictures of Improvement

Phil Diamond, CFA | March 1, 2010

Consumer Confidence swooned in February from January. The drop from 56.5 to 46 was far sharper than economists were expecting. The drop was largely due to changing attitudes about the jobs market and the pace of economic improvement according to the Conference Board. Not to editorialize (but we will), the people they interviewed to reach this conclusion must have been nuts. This is a period in which we saw that the economy was growing rapidly, where job destruction nearly came to a halt, and where the major concern in the markets was when all the stimulus would end. This is rear-view mirror stuff and will probably be reversed next month.

Consumer Sentiment fell a little bit from 74.4 in January to 73.6 in February. This doesn't really concur with the Consumer Confidence report above. This is a different survey, with different questions and reported by a different organization, so the difference should be expected. But the trend in both was down, just nowhere near as radical a move in the Sentiment index as the Confidence index.

While the consumer confidence and consumer sentiment survey are disappointing, they alone are not reasons to worry about the length or strength of the economic recovery or the market advance. Consumer sentiment is very much a lagging indicator and in times past has bottomed well after the onset of bull markets and economic recoveries. The current low for consumer sentiment was way back in May last year, although we aren’t that far from those levels after this past month’s reading. Typically, consumer sentiment turns several months after the onset of recovery and even further after the onset of bull markets. The recent reports are just a couple more bricks in the wall of worry that this bull market must climb.

The idea that everything must be hunky-dory before equities can do well is a fallacy. When everything is hunky-dory, stocks tend to be over-owned, over-believed, and overvalued. High degrees of consumer confidence are actually bad for stocks in the intermediate to long run. Skepticism is what bull markets thrive on.

Think of the examples of great buying opportunities of the past. They have all come at times of uncertainty. Just look back to the mid 1970s – the world seemed to be coming unglued with oil embargoes, currency weakness, global recession (the worst since the Great Depression then), war in the Middle East, and a bunch of other issues too numerous to list. Yet, we survived and we made lots of money for a few years (S&P 500 returns were stellar in 1975, ’76, ‘79 & ’80). The picture might have been worse by 1982 with interest rates at 20% +, unemployment above 10%, inflation above 10%, the world in chaos, and deficits as far as the eye could see -- awful, awful stuff. Yet, we survived and went on the biggest rise in stocks since the 1950s (the S&P 500 returned 21.6% in 1982 with not a negative year until 1990). What mattered was the part that we survived. These economic issues are transitory. That situation is always changing. The bigger picture is always the same, billions of people trying to improve their lives any way they can. That global urge has been partially thwarted by unyielding religions, political systems, despots, natural disasters and other plagues, but it survives.

As we move into each new year, more and more people are doing better than the year before (collectively, around the world). We haven’t eradicated hunger, disease, poverty or ignorance, but we are moving ahead. So long as we are better off than before we can keep moving in this direction. We had less to be sanguine about back in the early ‘80s than we have today. The odds of total annihilation have probably dropped pretty substantially in the last 30 years. I doubt that President Obama could find the big red button in the Oval Office today. No, Bush the elder (George H.W.) took care of the Ruskies once and for all (well maybe not for all). China is an economic competitor, but not necessarily a great military one. Take a second and count your blessings and you’ll see that they amount to more than you thought, maybe not as many as you’d like, but more than you thought.

We would like to thank our colleagues and business partners at FocusPoint Solutions for their contribution to our Commentary. Particular thanks go to Phil Diamond, CFA; Ryan Long, CFA and all within their research staff. We look forward to their on-going Commentary contributions.

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