SAN FRANCISCO -- The consumer is falling! The consumer is falling! Or so chanted Wall Street's version of Chicken Little Tuesday, as a weaker-than-expected consumer confidence report sent stock proxies tumbling.
Dow Jones Industrial Average
shed 1.6%, the
lost 1.5% and the
declined 2.5%. Yes, it was a late-summer, low-volume decline, but that doesn't make it any more palatable to those who are long stocks.
As is often the case, Treasuries benefited from the weakness in equities. The price of the benchmark 10-year Treasury note rose 21/32 to 101 9/32, its yield falling to 4.84%.
Certainly, there were other factors at work -- including estimate cuts by Goldman Sachs on
and Bear Stearns on its fellow brokerages -- but the consumer confidence report was the main catalyst for today's market activity. The dollar slid vs. the euro and yen after the confidence figures were reported, as
Rick Santelli noted.
Meanwhile, stocks were in modestly negative territory before the 10 a.m. release of
the confidence report, tumbled thereafter and never really recovered.
The Conference Board reported consumer confidence fell to 114.3 in August vs. 116.3 (revised from 116.5). The index fell to its lowest level since April and dashed expectations for a rise to 117.5.
But expectations that consumer confidence would rise were irrational, according to Mark Vitner, economist at First Union in Charlotte, N.C.
"It's hard to imagine the consumer could block out the news of layoffs," he said, noting the "inverse relationship" between confidence and unemployment.
But, as did other economists, Vitner described the market's reaction to the data as overdone. "I don't see why financial markets are as alarmed as they are," the economist said.
First, while those consumers reporting jobs as "plentiful" fell to 33.4% from 35.6%, he noted they are still twice as plentiful as survey respondents who believe jobs are "hard to get." The latter category rose to 15.9% from 14.1%.
Second, he observed that consumers' buying plans for houses, automobiles and major appliances remain largely unchanged -- that is, still at relatively high levels.
Another aspect of the report that can be "spun" into a positive is the difference between trends in the "present situation" index -- which fell to 145.8, its lowest level since April 1997 from 151.3 -- and the "expectations" index, which rose to 93.3 from 92.9.
February, you'll recall, some economists argued the then-steeper fall in the expectations index suggested that fears the economy already was in a recession were overdone.
Between September and February, when the overall confidence number bottomed, the expectations component fell 40%, while the present situation index shed 10.3%. Overall, consumer confidence fell 25% in that period.
But observers now say the recent history suggests the expectations index is an able forecaster, giving them confidence about the outlook going forward. Since February, the expectations component is up nearly 32%, while the present situation index is down 12.7%. Overall consumer confidence is up 4.7%.
Late last year, "the expectations index was correctly telling you of some slowdown in the future," said John Lonski, senior economist at Moody's Investors Service. "Now, it's telling you how confident consumers might feel about looking past current difficulties and making spending decisions accordingly."
Given the growth in money supply, the steepening yield curve and other forward indicators (plus tax and rate cuts and lower energy prices), he believes the expectations index is correctly forecasting an upturn in the months ahead. Vitner expressed a similar view.
Lonski, who claimed the market went "overboard" in its reaction to the data, noted that the overall confidence figure remains above its February low and well above levels seen in prior recessions. The decline in the August data was "worrisome, but not something to panic over," he said, adding that solid retail sales data from Redbook were almost completely overlooked.
Another issue that may have spooked investors today is anticipation about tomorrow's revision to the second-quarter GDP data. The consensus estimate is for a revision to unchanged vs. previously reported growth of 0.7%.
Lonski's forecast is in line with the consensus, as is Vitner's, although the latter offered a range of between negative 0.2% and plus 0.5%
Lonski argued the second-quarter GDP is "water under the bridge." But both he and Vitner (and many traders) agree there could be some psychological impact to headlines blaring "Recession" if the revision puts second-quarter GDP in negative territory.
Then again, there could be some
psychological impact if the revision doesn't put second-quarter GDP in the red. If the market's recent on-again, off-again pattern holds, tomorrow should be an "up" day and a better-than-feared GDP revision could be the catalyst.
The Horse's Mouth
Yesterday, I was unable to reach Richard Arms of Arms Advisory to get his input regarding the
debate over his index.
Today, the veteran technician was loath to put himself in the middle of the dueling gurus -- Don Hays and Tom McManus: "If it ain't broke, don't fix it," was Arms' only (publishable) comment on the matter.
In his most recent market commentary, published Monday, Arms wrote that the "oversold condition" of the 10-day moving average of the Arms Index, as well as similar conditions in the 55- and 100-day averages, are bullish and suggest a move with "staying power."
The Dow could retest its all-time high of 11,909, he wrote, which would be a 16.5% gain from today's close.
In our brief conversation, Arms said he is "not sure this is meaningful," when asked about today's downturn, which was obviously in conflict with his bullish view. Consumer confidence is a contrarian indicator, he argued, recalling how "everyone was screaming how bullish
confidence was at the top of the market."
Still, it should be noted that Arms' short-term optimism is in stark contrast to his long-term view that "the market has entered a consolidation phase that may be long-lasting."
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.