Fisher Investments Editorial Staff
Media Hype/Myths, Investor Sentiment

Incremental Positives

By, 08/31/2011

Most recent news has focused on negatives—and if a story’s not directly negative, the financial media seems to find a way to make it sound so. But there are (largely overlooked) positives as well—here are a few from today’s news:

Roman Rebound?

The tenor of news out of Europe has been primarily gloomy lately as they deal with the struggling periphery. But a few incremental positives from Italy are worth noting today—one indicating Prime Minister Silvio Berlusconi intends to abandon plans for a tax increase on high earners and another reporting a decent showing at the latest Italian debt auction.

Granted, Italy still faces austerity measures and will need to meet the requirements for the aid they’ve already received—and they’ll likely continue to need ECB backstopping for awhile to maintain debt financing costs at manageable levels. But lessening the tax burden on high earners likely proves an incentive to would-be (or existing) entrepreneurs to start or grow small businesses—a future source of economic growth and therefore still more tax revenue. And a source for hiring, etc. All positive things in our view—so long as Italy can indeed meet its austerity targets (maybe by taking a bigger axe to government spending?). (Read more of our view on taxes here.)

As for the debt auction—yes, demand dropped some from the last auction, rates are still high relative to Germany’s and it’s entirely possible the ECB is helping behind the scenes. Regardless, rates were lower than at the previous auction, signaling markets don’t seem overly panicked about Italy at this point and seemingly lowering the chances of a surprise Roman implosion—any way you slice it, a pretty good sign for continued European efforts.

Consumers Ramp Up Spending

Recently, we’ve highlighted some news and data that don’t support the broadly dire view many seemingly hold on the economy. Here’s yet more—consumer spending in July reaccelerated after two flat months—the strongest growth since December 2009. Wages also grew (a good sign for future spending), and core inflation remains benign. All positives that got little media mention.

Confidence Slumps

But reaccelerating spending doesn’t at all jibe with news the popular Conference Board consumer confidence survey had its largest drop since October 2008—and hasn’t been this low since April 2009.

You’d think if people were less confident, they’d spend less. Except, we see this quite frequently. People say (and feel) one thing but do another. In our view, what they do is much more telling than what they say.

Confidence surveys are inherently problematic as forward-looking indicators—of anything. First, they are in fact a survey on feelings, and feelings aren’t great economic gauges. What they typically do is track pretty well (at a lag) how people feel about the stock market. We’re in the midst of a correction (most likely), so stocks have dropped pretty fast—hence, confidence dropped fast too. If the stock market continues rebounding, confidence likely rebounds too. Historically, confidence surveys have been coincident at best—you can’t glean much about where stocks go from here based on how people felt last month. (Particularly when it’s clear people said they felt lousy but still went shopping.)

But another curious thing about this—remember, consumers’ confidence hasn’t been this low since April 2009. March 2009 marked the bottom of a very big bear market. It’s not surprising people felt pretty darn bad about things in April—it likely wasn’t clear to them a bottom had formed, and the stock market fall had been steep. But that was a terrific time to ignore feelings (and surveys about them) and buy stocks. 

That’s not to say stocks must similarly boom from here. However, it is a clear indication consumer confidence says little about future economic or market direction. That, we’re confident of.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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