Call # 1: Consumer confidence has little relationship to consumption

Last week, data from the Conference Board showed that consumer confidence plunged in August to its lowest level since early 2009. Of course, this begs the question: Does the recent collapse in consumer confidence mean that the US is heading back into a recession?

The short answer is not necessarily, and the reason is that there has generally been little-to-no relationship between what consumers say and what they do. Historically, lower confidence numbers are not indicative of lower spending, a point illustrated by the fact that August retail same-store-sales numbers came in ok.

In fact, over the past 30 years you can explain only about 3% of the change in personal consumption through consumer confidence.

Instead, spending has generally been driven by a much broader set of economic conditions, particularly those related to the labor market. Most of these measures are still indicating that consumption should remain depressed, but it does not yet appear to be on the verge of collapsing.

I continue to believe that the most likely direction for the global and US economy is one of tepid, but positive growth. Fragile confidence can certainly undermine the economy and has already undermined financial markets. However unless people change their behavior — and not just their mood — current indicators still suggest that another recession can be avoided. If that is the case, equities still appear under-priced for longer-term investors.

Call #2: Remain positive long term on equities, but expect elevated volatility and softness in September

As I noted in my Labor Day blog post, September is historically a bad month for stocks. But it is particularly weak when you come into the month down year-to-date as we have this year.

I still am positive long-term on equities, particularly relative to bonds. But if historical precedent holds, September is likely to be characterized by more equity market volatility and arguably more losses. Investors should be aware of this seasonal bias before they consider adding to new positions in the near term.

Source: Bloomberg