Confidence Lost - Consumer Sentiment at All-Time Low

By The Greek - Economy and Markets

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Every measure of consumer and investor sentiment shows Americans intently concerned about the economic situation and unraveling financial markets. I think the consensus of experts agree that Americans have good reason for trepidation. Economists, government officials, media and even Joe the Plumber are in fact reinforcing expectations for economic trouble these days.

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Conference Board's Consumer Sentiment Index

The most recent litmus test of the consumer's mindset, the Conference Board's Consumer Sentiment Index, hit an all-time low in October, as reported on Tuesday. The New York area research firm indicated its October reading of 38.0 was the worst on record, and that record dates back to 1967. The index is a broad measure, based on a survey of 5,000 Americans. The October drop of 23.4 points, from September's revised level of 61.4, represented the third largest in the history of the series.

If ever there were a time, these are truly days worthy of record lows. We've seen the largest bank failures in our history and the greatest government intervention as well. Unemployment is widely expected to climb to as high as 10% as recession takes grip of the economy. The Conference Board measure indicates that consumers have also bought into that view. The percentage of consumers saying "jobs are hard to get" rose five points to 37.2.

The index stopped counting on October 21st this month, and even though things got worse thereafter, it was clearly a tough time to take count. Still, the Conference Board's measure was not the only metric recently showing dramatic deterioration.

State Street Investor Confidence Index

State Street (NYSE: STT) offered its latest measure of global investor confidence on October 21st, and it dropped 17.5 points to 58.2. The decline in North American investor sentiment was particularly dramatic, as confidence in the region fell to 50.8. In case you were wondering, European confidence fell just slightly to 79.6, while Asian investors' feelings were captured at 86.5.

State Street's index pays particular attention to asset allocation, rating equity exposure as a barometer of investor preference for or avoidance of risk. As you might have imagined, plenty of capital had run out of equity portfolios in the measured period this time around. State Street Associates Director Paul O’Connell said, "The period over which this reallocation was measured in investor portfolios, September 17 to October 15, saw the largest single reallocation away from risky assets that we have witnessed in the data since it first became available in 1994."

The fact that State Street's metric looks at actual capital flows, and its mention that this last period dwarfed the activity during the Asian Crisis of 1997 and the Russian-LTCM Crisis of 1998, is disturbing to say the least.

Reuters/University of Michigan Consumer Sentiment Index

Reported mid-month, the University of Michigan's preliminary measure for October fell to 57.5, from September's final reading of 70.3, marking yet another huge falloff in confidence. Economists were looking for a reading 8 points higher than that. We found both good news and bad news in this report. While long-term inflation expectations have retreated significantly from prior concern levels, economic expectations have been significantly damaged. Michigan's "Expectations" reading was even lower than the Sentiment measure, at 56.7.

So, it's unanimous across sentiment readings. In one case though, the money is where the mouth is, as State Street measures real capital flows. This leaves us with an important question. Will consumers also put their money where their mouth is, and refrain from spending over the quintessential holiday shopping season? What kind of damage would that do to the retail/consumer discretionary space (AMEX: SZK, AMEX: XLY, NYSE: RTL), and what residual effect would commercial real estate see. If you've been reading our column, you already know this is a rhetorical question.


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