Who Knows Best: Ailing Consumers or Stock Bulls?
Why is the stock market at record highs while consumer confidence in the economy has plunged back to pre-Gulf War lows? A few possibilities:
A) The stock market doesn’t know diddly about the economy. B) Consumers don’t know diddly about the economy. C) Neither the economy nor consumers matter anymore--only stocks matter.
Confidence and stock prices had been on the same track since mid-1990: Both tumbled with the start of the Persian Gulf crisis, rocketed with the quick Allied victory over Iraq last winter and churned at high levels last summer.
But in October, confidence suddenly crumbled as doubts rose about the economy’s stamina. The Conference Board research group’s index of consumer confidence, based on monthly interviews with 5,000 households, slumped from 72.9 in September to 60.4 in October.
To put that index in perspective, it averaged 100 in 1985, an economic boom year. The all-time high was 138.2 in February, 1969. The all-time low was 43.2 in December, 1974. At 60.4 now, the index appears to reflect consumers’ growing fears of another recession. Layoffs still are rising, spending is down and key parts of the economy--such as housing and autos--show no signs of sustained recovery.
Noting that consumer spending accounts for two-thirds of gross national product, some analysts say the confidence index is strongly foreshadowing another economic slump. To these bears, the continuing surge in stock prices is absurd. When investors wake up to the reality of a new recession, the stock party will end violently, the bears say.
“The U.S. equity market is falsely anticipating that lower interest rates will bring the economy up to the level of equity prices, when in fact lower interest rates are reflecting a declining economy,” argues Albert Sindlinger, whose Sindlinger & Co. in Wallingford, Pa., also tracks consumers’ sentiment and their financial health.
His surveys now place 15 states in outright “depression” mode based on consumers’ fiscal health (California is one of the 15), up from just two states in depression in August.
To Wall Street’s bulls, however, the consumer-confidence figures mean little or nothing. We’ve seen this before, they say: Consumers can’t predict what’s ahead--they merely react to the immediate past. Stocks, on the other hand, have historically been an excellent forecaster of economic trends, the bulls note.
They have a point. At the start of the great bull market of the ‘80s, in the fall of 1982, stocks roared ahead even as consumer confidence remained weak. From August to October, 1982, the Dow Jones industrial average rose from 777 to top 1,000, heralding the end of that year’s recession.
Meanwhile, the Conference Board’s confidence index fell from 63.2 in July of that year to 54.3 in October--which was the low for all of 1982.
Today, investors are looking into 1992, and they see a healthy enough recovery to warrant buying stocks, argues Mitchell Meisler, executive vice president for stocks at Shearson Lehman in New York. “We think we’re going to see a pretty sharp turnaround in corporate profits next year.”
And if not? Well, that brings up a third possibility, which is answer “C” above: Even if there is no economic recovery to speak of next year, investors continue to pour into stocks because--well, just because. There’s nothing else to buy, given real estate’s depression and interest rates at 18-year lows. If a new economic boom doesn’t happen in 1992, then everyone will begin to look toward 1993--and they’ll buy (or just hold) their stocks based on glorious hopes for that year.
The bears contend that such arguments are pure folly. But then, stocks’ astounding rally has already gone on this year for far longer than most of the bears figured was possible. Some analysts say fighting the bullish trend makes no sense, because it shows no sign of weakening--regardless of what the consumer confidence numbers would suggest is happening to the economy.
Each time the stock market dips a little, “People just can’t stand it--they have to get back in,” says Laszlo Birinyi, at research firm Birinyi Associates in New York. “One of the problems with investing is that people over-analyze things,” he says. “For whatever reason, the stock market is going up.”
The Reversal of Confidence The Conference Board research group in New York each month surveys 5,000 households on their confidence in the economy.
Source: Conference Board
