Confidence Will Return in 2009

The Conference Board reported today that the consumer confidence index fell to its lowest level ever, dating back to 1967. The index fell to 38.0 from 44.7 in November, below forecasts for a reading of 45.5.

The drop is hardly a shock given the condition of the labor market, which tends to impact the Conference Board's consumer confidence more than other confidence indices because of its very specific questions about the labor market. The poor news flow is also an obvious factor weighing on confidence.

With confidence so low, it is hardly a stretch to say that it will rebound, something that looks likely in 2009. Confidence is likely to follow a pattern that dates back about 40 years, whereby consumer confidence levels increase around the time of a presidential election and into the inauguration period and beyond.

Confidence levels are often correlated with presidential approval ratings, which for Barack Obama are sure to be higher in his early days than his predecessor, whose numbers have been in the 20s for quite some time. This represents a substantial change. Moreover, putting policies aside, Barack Obama is the type of man that exudes confidence, just as Ronald Reagan did. Some gasp when I put Obama and Reagan in the same sentence, but for many in America the comparison rings true.

Confidence levels are not normally high on the list of critical variables to watch, but the lack of confidence across the nation is feeding the economic and financial crisis. Higher confidence levels will reduce the risk premium in equities, helping equities to rally. A recovery in confidence is crucial to ending the crisis.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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