A clear correlation exists between the equity market and consumer sentiment. After all, the equity market is the expression of those who invest and trade for profit, an action based upon what the consumer decides to do or not to do, ultimately. If consumers are spending, businesses make money and thus their value rises for those who seek to own “equity” of a valuable business. Of course, the converse it true as well.
Then again, perhaps the correlation is on a different plane, a broader mental plane. Perhaps, the correlation exists in the mind of all of us. After all, the “market R us,” which means the overall market represents the expression of our collective psyche, investors, traders, and everyone else. This would explain the current yo-yo action of consumer sentiment.
- The Conference Board’s Consumer Confidence Index, which has been volatile lately, remained so in March. After flip-flopping in January and February, the index continued the up-one-month, down-the-next trend in March. The index was reported at 59.7, which was well below the consensus expectation for a reading of 66.6, and also down hard from last month’s revised reading of 68.0
Even with the continuing flow of positive economic data, neither the market nor the consumer is convinced all is well. A lingering suspicion that good fortune can turn to bad quickly still haunts us all, traders, investors, and everyone else. Yup, it could be as simple as that …
- The Chicago Fed reported that their National Activity Index rose to a reading of +0.44 in February from -0.49 in January (December: +0.25).
Now, mind you, the data above is for February and the consumer sentiment reading mentioned above is for March, which suggests a disconnect somewhere. To see that, one must understand exactly what the National Activity Index represents.
- The index is a weighted average of 85 indicators of national economic activity. The indicators are drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.
So, the index switched from negative in January to positive in February and, according to the Chicago Fed, this means the US economy is demonstrating “above average growth.” Yet, in March, consumer sentiment falls hard and the market acts like a yo-yo as well.
No matter though, the market is looking forward and what it sees is US economic improvement, which brings us back to the correlation between the equity market and consumer sentiment. My guess is consumer sentiment will improve in April as economic improvement helps raise employment and the rising value of homes raises personal perception of wealth. This likely will keep the market momentum going.
- The Commerce Department reported that Durable Goods Orders rose +5.7% during the month of February, which was above the consensus expectations for a rise of 4.1% and above last month’s decline of -3.8%.
- On a year-over-year comparison basis, the S&P/Case-Shiller Home Price Index of 20 metro areas rose for a tenth consecutive month. The report shows that home prices in the U.S. rose by +8.1% year-over-year.
As to the global economic picture and the market, well, some murkiness is still there, but with China rebounding, Japan making a valiant attempt to turn its economic fortunes around, and Europe in the middle of all of this, I suspect the market sees the future in a positive frame.
- Japan and the European Union agreed Monday to start negotiations for a free trade pact encompassing nations that account for nearly a third of the world economy. The leaders agreed to launch the negotiations toward a “deep and comprehensive” free trade deal, with the first meeting set for next month.
- Earlier this month, Abe announced Tokyo will join talks on a Pacific trade pact, the U.S.-led Trans-Pacific Partnership. The U.S and EU announced free trade talks earlier this year aimed at creating the world’s largest free trade zone.
Currently, both the market and the consumer are confused, but that should all clear up as the world settles in to a more stable economic growth-oriented space. All the more reason to buy on the dip and sell on the rip, at least for the near term anyway, you know, with the Cyprus issue now stirring up the media to talk about how the solution will destroy the Cypriot economy, etc. etc. etc.
Trade in the day; Invest in your life …
