The Wide Divide Between the Confidence of Consumers and Investors

Equity Strategy

The shortened week started off by offering an intriguing contrast of economic data. A duo of confidence measures reached the wire at the same fateful moment, but that's about all they had in common. The Conference Board's Consumer Confidence measure and State Street's (NYSE: STT) Investor Confidence mark could not have been separated by a more wide divide. However, the simple act of turning on your television should give you the reason why.

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The Wide Divide Between the Confidence of Consumers and Investors

While the Consumer Confidence Index jumped by 5.6 points, the Investor Confidence measure fell by 9.2. Each of the two important economic barometers measured the month of February, so a difference in timing was not at play. The difference between the two measures is neither regional, as North American Investor Confidence fell in communion with Global Confidence, dropping by 6.8 points to a mark of 92.5 in February.

We should have led you by now to the key difference between the two measures. While North American consumers could care less about global unrest, North American investors find it quite meaningful. As gasoline prices rise toward $4 though, well then it should matter to the American shopper as well.

A Closer Look at Consumer Confidence

A closer look at the Consumer Confidence metric sucks some of the wind right out of the bubblistic expansion in the index. The consumers' gain in confidence was mostly prospective. As we've seen in similar past increases in this measure, though, those prospective hopes can quickly be pulled out from under us, leaving investors who had banked on gains as a result of them finding they are suddenly without footing.

Consumers' views of current conditions remained near despair, as the Present Situation Index increased to 33.4, from 31.1. While there was improvement in sentiment, the details show a very low count of respondents were actually found to be in a good mood. Only 12.4% of those surveyed said business conditions were good, and just 4.9% said jobs were plentiful. A great many more people felt like things were horrid. Some 39.6% said business conditions were bad, while 45.7% said jobs were hard to get. Do you see how the message changes when expressed in detail, rather than by the headline alone? While all measures gained, the absolute view remained the same, and that was that the business environment is terrible.

And while the respondent representatives of American consumers saw a bad current state, they were looking toward a better tomorrow. Ah the American spirit never dies. That optimism also helped the broader confidence index, as Americans were hopeful. The six-month outlook for business conditions improved, yes, but by just four-tenths of a point, to a measly 24.4%. Fewer people thought business conditions would worsen over the next half year, but that may simply be because they can't get much worse. As far as the job market goes, those expecting a better labor environment actually fell. Though, once again, fewer people thought things could get much worse. It's not such a rosy report at closer inspection, and that truth lends this overall article to lean toward the case for lighter stock positions.

Investor Confidence Shows Smart Money Running

February's Global Investor Confidence Index shed 9.2 points, dropping to a mark of 91.6, from 100.8. The North American Confidence Index moved to 92.5, from 99.3. Things were not much better in Europe or Asia. European investors were especially shaken by the unrest across their borders, with the representative index losing 13 points, moving to 19.8. The Asian Index lost 4.3 points to 92.2.

This index measures the movement of capital by institutional investors, or some of the smart money. Thus, this decrease signals that institutions are reducing equity positions this month (measures short of 100). State Street's commentary rightly attributes the majority of the blame on Middle Eastern and North African unrest. The money manager also reports that European softness is probably also seeing impact from its own region-specific issues, including the European Financial Stability Facility and upcoming March negotiations on sovereign debt. We will neither leave out the rising concern of the ECB with regard to inflation, which should lead the regional bank to begin the liquidity unwind ahead of the US Federal Reserve.

Conclusion: Lighten Up On General Equity Positions

State Street makes notation of favorable capital movement into the financial and energy sectors, some of which is clearly due to the Middle Eastern unrest. Meanwhile, technical indicators galore have continued to offer omen of upcoming correction. Given the catalyst of civil unrest, which seems to be contagious, the cut in confidence makes perfect sense. We expect if the unrest continues, then consumer confidence will wane as well. Gasoline prices affect the consumer mood significantly, as fuel use cuts into the American family's budget rather deeply. Considering the rise in price in all sorts of other goods, then we see all the more case to reduce US equity holdings near-term.



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