Wall Street Greek: Consumer Confidence and Investor Sentiment Waver

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Time to Take Profits

A duo of reports this week indicated that confidence has wavered in both the consumer and investor segments. For this reason and more, we think now is a good time to take some capital off the table, and reduce risk in portfolios away from equities for the near-term.

Consumer Confidence & Investor Sentiment Waver

Two key metrics measuring consumer confidence and investor sentiment both offered the same sobering news on Tuesday. Confidence has wavered from the careless spendthrift days of late (those being in August!). While consumers have been spending slightly more than dead people, investors have been enjoying a folly-filled ride from the panic-level pit of March 9. The S&P 500 Index was recently up over 50% from that day's pitiful low, but that was just the right amount of profit to raise the question in the collective mind of investors, "How much higher can this market go anyhow?"

Investor Sentiment, as measured by State Street (NYSE: STT), fell globally to 118.1 in September, from 221.9 in August. The North American segment of this measure dropped 4.6 points, to 113.7. That still marks an expansion of risk taking. Also, considering the metric is up from a 52-week low of 82.1, and that it fell from its five-year high set in August, the news does not ring scary. Still, just as Rome was not built in a day, it was neither dismantled in one. And we remind you, inflection points matter. Change in direction is a critical market-moving factor, and this decrease in sentiment marks the first decline post eight consecutive increases.

What we find most unnerving about this data is that it coincides with other red flags. Last week's Housing Sales slippage, for instance, offered solid reason for doubt in a sound real estate recovery. Federal economic caretakers have also reminded us of late that the end of recession does not necessarily mean the beginning of recovery is on tap. Nor does it signify that recovery will be as equally robust as contraction was terrifying. Meanwhile, stocks have already tallied big profits ahead of year-end closure. State Street's measure takes account of institutional investor sentiment, and many professionally run funds close their books in the fall. Thus, it's a fine time for performance minded portfolio managers to lock in those relative gains, which in turn pressures your stocks.

History also tells us that a string of monthly gains this long wears thin soon enough. September marked the seventh straight monthly rise for the S&P 500 Index, marking only the 16th time in history since 1928 that this has occurred. Needless to say, the odds of October following suit are slim to none. Also, as some funds have close their books for the quarter, they have likely also added market winners to their holdings (we call this window dressing). After September's end comes to pass though, all bets are off.

Consumer Confidence Still Lacking

Despite the Reuters/University of Michigan data posted last week showing a gain, consumer confidence is still lacking. The Conference Board reported Consumer Confidence fell in September, to 53.1, down from 54.5 (54.1 initially reported) in August. The fading figure also fell short of economists view for a reading of 57.0, based on Bloomberg's survey.

The Present Situation Index, the portion of the composite measure that represents the general view of the current situation, showed surveyed households are not holding up well. This index dropped to 22.7, from 25.4 in August. Much of the "Present Situation" concern seen in September can be attributed to the general impression of a poor job market. Some 47% of those surveyed now view jobs "hard to get," compared against the 44.3% that thought so last month. The Expectations Index shows that folks do not generally expect the labor market to improve much over the next six months. That has a way of weighing on spending my friends.

Conclusion

Between the change in investor sentiment and the unemployment burdened consumer segment, we think the winded market is going to find setback in October. Thus, now seems a good time to reconsider portfolio allocations, and to move some capital into less risky assets and out of equities temporarily.

The coming days will offer more insight into labor market conditions, with Monster Worldwide's (NYSE: MWW) Employment Index, Challenger, Gray & Christmas' Job-Cuts Report, and the Labor Department's tally of the unemployed on deck. Positive change in the Employment Situation Report seems the only potential savior for investors, but economists are generally looking for an uptick in the unemployment rate to 9.8%, from the 9.7% mark reported in August.