If one compares a key consumer confidence indicator with the Dow's performance over the past 18 months or so, a distinct pattern appears: consumer confidence has, basically, fallen in step with the Dow's.
Consumer confidence as measured by The Conference Board did edge up in March to 26, from a revised reading of 25.3 in February, but the index nevertheless remains near a record low. Economists surveyed by Bloomberg News had expected the index to rise to 28.0 in March. The index was at 37.4 in January and at 38.6 in December 2008.
Moreover, it's not surprising that the Dow's sell-off has mirrored the consumer consumer drop. Historically, investors don't invest in stocks if they're not confident about the U.S. economy and about the outlook for corporate revenue and earnings. Needless to say, confidence about all of the latter has been in short supply during the recession that started in December 2007.
"Accumulating job losses, falling home prices, rising gasoline prices, tighter credit standards, and financial market volatility have all damped household attitudes about the economy," Steven Wood, president of Insight Economics LLC of Danville, California, told Bloomberg News Tuesday.
Current conditions metric remains weak
The Conference Board board said consumers' evaluation of present-day conditions weakened significantly in March. Those claiming business conditions are "bad" increased to 51.1 percent from 50.5 percent, while those claiming business conditions are "good" dipped slightly to 6.8 percent from 7.0 percent.
Consumers' assessment of the job market was considerably more pessimistic than last month. Those saying jobs are "hard to get" rose to 48.7 percent from 46.9 percent, while those claiming jobs are "plentiful" was unchanged at 4.6 percent.
Further, the board said that although consumers' short-term expectations improved slightly in March, the metric nevertheless remains at a very low level. Consumers expecting business conditions to worsen over the next six months decreased to 39.1 percent from 40.7 percent, while those anticipating business conditions to improve increased to 9.1 percent from 8.5 percent.
Also, the proportion of consumers expecting their incomes to increase declined to 7.5 percent from 7.9 percent.
The Conference Board's consumer confidence index is based on a representative sample of 5,000 households.
Investors need to pay attention to the consumer confidence index because, historically, consumer spending has accounted for about 60 to 65 percent of U.S. GDP. Moreover, rises in consumer confidence are directly correlated with increases in consumer spending. Hence, if confidence rises, and a trend forms, most likely that means good things for corporate revenue and earnings.
Economic Analysis: Hey, can you blame the typical investor for a confidence level that mirrors the Dow's decline? To quote a phrase popularized by basketball legend Michael Jordan, "Not really." Consumers' are justifiably concerned about the large level of job layoffs and uncertainty regarding what's up ahead. Like the institutional investor, the typical investor has sensed that the U.S. and other developed nations have entered a period of structural change where once thriving, established businesses -- whole sectors, even -- can be displaced. At least initially, that's an environment where it's hard to discern who the winners and losers will be, from a corporate earnings standpoint, which leads to money sitting on the sidelines, and out of the stock market.
Further, given the enormous changes taking place macroeconomically, investors will likely have to see months of comprehensive good news (business hirings, increased earnings, deals, project expansions) -- not just isolated, positive data points -- before they commit to U.S. stocks in a sustained way.