Confidence, the Julie Andrews Way

I have confidence in sunshine
I have confidence in rain
I have confidence that spring will come again
Besides which you see I have confidence in me

-Rodgers & Hammerstein in “The Sound of Music”

I know that I have used this lyric previously, but any chance to hum along to “The Sound of Music” is fine with me, especially amid the tumultuous economic times in which we live. With that said, there is a connection between Broadway and Wall Street, which parenthetically, do actually physically intersect in lower Manhattan.

Yesterday, the Conference Board, a not-for-profit organization that provides and disseminates research, released its monthly survey of consumer confidence. Like many of its peers, this index attempts to gauge consumer attitudes on present economic conditions and expectations of future conditions. In other words, they want to know how we feel. The answer as of October 21 from the 5,000 people surveyed is that they feel glum. The Conference Board reported that last month’s index fell to a historic low level of 38.0, down from 61.4 in September and far worse than the average forecast of 51.5 (the index is measured against a bogey of 100, which was the 1985 level).

Why were market-watchers initially fretting about these results? The answer is that consumer spending accounts for more than two-thirds of the economy, so investors want to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend—and in the current state of the dismal economy, the opposite is also true. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy and potentially, to the stock and bond markets. There is a caveat (isn’t there always?!). While the level of consumer confidence is associated with consumer spending, the two do not move in tandem each and every month -- sometimes people say one thing, and do another.

By the end of the day, investors had decided that the confidence measure was not as bad as thought. After all, don’t we already know that people feel rotten? In fact, the reasoning goes, the stock market is in the process of discounting all of that negative stuff, which is why stock prices have dropped off of a cliff in October. You could almost hear people convince themselves of this fact throughout the day as stock prices increased. The final hour was crazy as the buying reached a frenzied pace. When it was over, the Dow and S&P 500 had soared nearly 11%, while the NASDAQ surged by 9.5%.

In other words, as of yesterday, investors were clear that while they were confident in the Conference Board’s results, they were less sure that the horrible numbers indicated anything new and trade-able.