By John L. Chapman, Ph.D. Washington, D.C. November 11, 2011
Confidence among U.S. consumers has risen in the last month, and along with debt-reduction news out of Italy, has helped to send stocks up sharply today. This news offers further confirmation the U.S. economy is in a growth mode (however tepid): the Thomson Reuters/University of Michigan preliminary index of consumer sentiment climbed to 64.2 this month, the highest since June, from 60.9 in October. The median consensus estimate had predicted a report in at 61.5.
Implications for the Economy and for Stocks
Sentiment surveys historically show only a very weak correlation to real economic activity, interestingly enough, but in recent years the higher levels of volatility have shown movements in asset prices in the short term thanks to investor belief that consumer confidence has moved one way or another. Thus, coupled with other better-than-expected news recently, including falling jobs claims (below 400,000) announced yesterday after the drop in unemployment last week, it is possible that consumer spending may increase in the months ahead, which in turn would lift stocks.
The larger story for the U.S. economy and equities, of course, is what is happening in the Eurozone, with threats to solvency in Greece and Italy (and in turn Spain and Portugal, to be heard from soon), as well as continuing impasse over U.S. fiscal policy and an express weak dollar policy. And it must be remembered, per the graph below, that in the five year (2003-2007) period of growth following the 2001-02 downturn, during a period of extraordinary monetary easing, the Michigan index averaged 89. Additionally, the Michigan numbers correlate well with core consumer prices, and are unduly influenced, for example, by the very visible price of retail gasoline, which has been stable in recent months and down from springtime highs. Hence it is important to keep this better-than-expected reading in a broader perspective.
Finally, the Michigan survey is interesting for its gauge of expectations about inflation: an inflation rate of 3.2% is the mean expectation for the next 12 months, the same as in the prior survey, with an outlook of 2.6% over the next 5 years. We regard this as erroneously low but are not surprised by it: this reading too can change quickly as events turn.
For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, John Chapman can be reached at john.chapman@alhambrapartners.com.
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Alhambra Partners Disclaimer: The information contained in this note comes directly from U.S. government sources (such as the Federal Reserve Board, U.S. Commerce Department, or U.S. Census Bureau), or from financial news websites or the print press (such as Bloomberg, Reuters, or the Wall Street Journal). The data contained herein are generally believed to be accurate, but Alhambra makes no implied or express warranties in this regard. Our aim with this commentary is to provide insights that could allow for the formation of investment strategies by individuals and firms, but forward-looking assertions again come with no express or implied warranties, and the purchase of investment securities comes with high risk. The opinions expressed here are those of John L. Chapman, and do not necessarily reflect those of colleagues at Alhambra Investment Partners, LLC or any of its affiliates.