ConsumerConfidenceMisses (Again), TumblesToLowestIn 7 Months
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No matter what measure of confidence, sentiment, or animal spirits one uses, the consumer is not encouraged by the record-er and record-er highs in the US equity market. The Conference Board’s consumer confidence datamissedforthe 2nd monthin a row – itsbiggestmissin 8 months – as it seems in October consumers were un-confident due to the government shutdown… but in November they are un-confident-er due to its reopening. As we have noted in the past a 10 point drop in confidence has historically led to a 2x multiple compression in stocks (which suggests the Fed will need to un-Taper some more to keep the dream alive). Ironically, more respondents believe stocks will rise of stay the same over the next 12 months even as the ‘expectations’ sub-indexcollapsedtoitslowestin 8 months.

Once again we remind that it’s all about confidence and hope appears to be fading…

As wehavenotedpreviously – this move in confidence is key…

But, it’s all about confidence… investors will not be willing to pay increasing multiples unless they are confident that the future streams of earnings are sustainable and forecastable… And simply put, thecurrentlevelsofConsumerSentimentneedtoalmostdoublefortheUSequitymarkettpapproachhistoricalmultiplevaluationlevels…

and the cycle appears to be shifting…

ViaCiti,

Isconsumerconfidencesettoturn?

Consumer Confidence is once again following a dynamic where we see it move higher for 4 years and 4 months before beginning to collapse

Moves higher from 1996-2000 with a smaller dip halfway through in October 1998Moves higher from 2003-2007 with a smaller dip hallway through in October 2005Moves higher and so far tops out in June 2013. Also sees a small dip halfway through in October 2011.

Higheryields do nothelpconfidence…

A sharpriseinmortgagerates has a negativefeedbacklooptoconsumerconfidence. For those families and individuals that were now looking/able to enter the housing market, the recent spike in rates acts as a headwind.

In addition to the economic backdrop, there is plenty of tail risk as we head into the end of the year. Oilpriceshavebeenrisingsincethesummerbegan (and in reality since the Summer of 2012), partially due to geopolitical risks which are very much “top of mind.” A bigger spike due to a supply shock would choke the economic recovery.(In our view)

In the US, the appointmentof a new FedChairman and the upcoming budget/debt ceiling debates are likely to bring added volatility. Tapering itself can also induce concern as the “Bernanke put” is being removed from markets.

InEurope, manyofthestructuralproblemsrelatedtothe single currencyunionhavenotactuallybeenaddressed and the peripheral countries could still create turmoil going forward (see Fixed Income section focusing on Italy in particular for more on this). There has also been little concern with both the German elections and the German Court decision on the constitutionality of the OMT program. A surprise in either of these could be cause for concern.

EmergingMarkets are stillnotoutofthewoodsyet as growth has been weak relative to expectations and countries with current account deficits are beginning to feel pressure in their FX and Bond markets. This is an issue we believe is only starting to develop which we will continue to expand on at later dates.(We have also looked at this in our EM FX section this week)

Overall, theweakeconomicbackdrop, poorhousingrecoveryandpotentialfortailriskeventsoverthenextfewmonthssuggestthatwehavetoppedoutinConsumerConfidence, a warningsignforequitymarkets.

TherelationshipbetweenConsumerConfidenceisclear, andIFJunedidmarkthehighandConfidencecontinuesto decline, thenwewouldexpecttoseethattranslatetoweaknessintheequitymarkets. Theremovalofthe “Bernankeput” onlyaddstothisconcern.

A major turn has taken place in equity markets on average four months after Consumer Confidence turns, which would point to a decline beginning around September-October. As we have previously expressed, we remain of the bias that a correctioninequitymarketsontheorderof 20%+ islikelythisyear/ into 2014 andthecurrentdynamicssupportsuch a move.

Should we see a decline of that magnitude, it is almost certain that yields would move lower in a rush to safe assets.

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