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How much stock should we put in the Consumer Confidence report?

Today we got a fresh look at the consumer confidence report for the month of September. The number is not much changed from August and is not really a surprise.

There are persistent negative headlines in the media about the EU sovereign debt crisis, lower growth expectations worldwide and stubbornly high unemployment rate. To top it all off our government seems unable or unwilling to tackle the problems facing our country. Consumer Confidence index published by the Conference Board has declined steadily from about 66 in April to 45 in September.

But how much stock should we really put in this reports data? Does it actually tell us something that can help formulate a trading strategy? As the long-term chart below shows, the index is now near the lowest point in 16 years. This is also true for confidence indices for many major world economies.

We know the data, but what does it mean? What we really need to understand is whether this index has a significant correlation to consumer spending habits. The short answer is no.

Later this week on Friday we will get another look at consumer income and spending growth. That economic report has a larger bearing and more predictive power about what will happen in the upcoming months. Consumer spending is responsible for as much as 70% of the US economy and is a good barometer for strength in US equities. As the consumer Personal Spending chart shows below, US consumers have reduced spending in only 3 months out of the last 24 months. In fact, the spending increase in July was the second largest increase in the last two years. This is further corroborated by the drop in US Savings rate which tumbled from 5.5% in June to 5.0% in July.

The simple fact is that those you have a job are seeing a rise in Personal Income. The chart below shows how income has been on a rise in the last several months and the trend is still looking pretty good. On Friday we will get the numbers for the month of August and they are expected to stay in the general range of the last few months. We can also see that the year-on-year rise in income is approaching that of the “good years” in the stock market of 2004-2007.

In other words, if US Consumers are making more money they are likely to spend more money, even if they are despondent when surveyed about their level of confidence. Consumer Confidence index gets a lot of attention but is not a good measure of whether consumers will rein in spending in the upcoming holiday season. If we continue to get good income growth for those employed, we could have a Christmas rally on our hands even if unemployment remains elevated and consumer confidence remains low.

Charan Singh
OptionsANIMAL Instructor

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