Oct 31, 2008

World - US;Consumer confidence plunges,but stocks soar

ALEX ALTMAN
Battered by declining equity markets and a gloomy long-term economic forecast, U.S. consumer confidence plummeted to its lowest level on record this month, according to a report released Oct. 28 by the Conference Board, a private research group. According to its consumer confidence index, which had improved in September even amid Lehman Brothers' collapse and the government's bailout of insurance titan AIG, consumer sentiment tumbled from 61.4 in September to 38 this month, a nadir for the survey, which was launched in 1967, and its third-largest individual drop.
Ironically, within hours of the bleak consumer-confidence report, the stock market posted its second biggest one-day point gain this month, with the Dow Jones industrial average rising 889 points to close at 9,065. It's not the first time the two indexes have moved in opposite directions. In fact, a 2002 investment-research study found that low consumer confidence can, at times, be fertile ground for bullish stock-market moves. "At extremes, there does tend to be a negative correlation between consumer confidence and stock prices," notes money manager Ken Fisher, a co-author of the study.
But don't close the recession book just yet. While analysts had expected confidence levels to decline given the hammering financial markets have endured in recent weeks, the plunge was 14 points worse than the 52 rating economists foresaw. "Consumers are extremely pessimistic, and a significantly larger proportion than last month foresee business- and labor-market conditions worsening," says Lynn Franco, director of the Conference Board's Consumer Research Center. "Their earnings outlook, as well as inflation outlook, is also more pessimistic," she adds, noting that these conditions don't augur well for retailers, "who are already bracing for what is shaping up to be a very challenging holiday season."
The report, which surveyed 5,000 households, was stuffed with grim data. The percentage of respondents expecting business conditions to worsen spiked to 37% from 21%, while the proportion of consumers anticipating a tighter job market in the coming months surged from 27% to 42%. Less than 10% of consumers believed business conditions would improve over the next six months. "We're in uncharted territory," Sheryl King, a senior U.S. economist at Merrill Lynch, tells TIME.
How bad could it get? King says retailers could be forced to weather a 2.5% to 3% yearly decline in consumer spending — a drop which she says would be the largest since the mid-1970s, when the U.S. was mired in the depths of a recession.
"This is a shock to consumer psychology of a magnitude we haven't seen in decades," says Colin McGranahan, a retail analyst at Sanford Bernstein. "Combine that with a loss of confidence that the housing and equity markets can create wealth, and you could see a change in the consumer's propensity to save. That has very significant consequences for discretionary spending," particularly during the holiday season, which retailers count on to provide a significant chunk of their annual earnings.
The sharpest confidence drop was found among households earning more than $50,000 per year, McGranahan says, noting that this group tends to have more money tied up in equity markets. "It's the top wage earners who are feeling this right now," King says, although "it's spread into every corner of the country. Nobody really feels safe."
Among the businesses that could suffer if consumers decide to put away their wallets are high-end retailers who provide discretionary entertainment. "I would be shocked if there were not a decrease. Everything leads us to believe that there will be," says Liz Neumark, CEO of the New York City–based catering and event-planning company Great Performances, which puts on weddings, bar and bat mitzvahs and other pricey bashes at tony locations like Manhattan's Plaza Hotel. "I've known from the first quarter that Christmas this year was going to be different." But she's remaining optimistic. "Wall Street bonuses are off, people are taking hits to their investment accounts, but I don't think people are going to stop from giving their daughter the wedding of a lifetime," she says. Perhaps that's just a glimmer of hope, but then a glimmer is likely all there was behind today's powerful stock-market rally.

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