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If The Market Declined 15% . . .

Posted by Larry Doyle on October 28, 2009 9:22 AM |

. . . would you be surprised? What would you do? What if the market declined by 20%? Would you be surprised? What would you do? How about if the market rose by 10% to 20%? Would you be surprised? I would.

The reason I ask these questions is an attempt to address the fundamental question as to what the market is telling us and what American consumers believe.

The equity market has traditionally been a reliable indicator of the future economy. The market provides a discounted valuation of future earnings. Those earnings drive companies and the economy at large.

As the market declines and prospects wane, businesses and consumers react accordingly. On the other side of the coin, as the market improves forecasting an improving economy, businesses and consumers react accordingly . . . until now. What is going on?

Yesterday’s release of the most recent Consumer Confidence data provides a very sobering view of the future. As The Wall Street Journal highlights:

Consumer confidence is falling backwards as pessimism grows over the jobs market. The Conference Board’s index fell more than 5-1/2 points to 47.7 in October, barely above 47.4 seen in July. The assessment of current conditions is alarming, at 20.7 for a nearly 2-1/2 point decline and the lowest reading yet of the cycle. Job readings are very weak for the present situation with 49.6 percent, that is nearly half of the 4,000 sample, saying jobs are hard to get, that’s up more than 2-1/2 points from September. This reading contrasts with improvement underway for jobless claims and will raise questions whether payroll contraction will deepen, not improve, in October.

The expectations component also fell, down 8 points to 65.7. Here the key reading is expectations for future income where fewer see an increase, 10.3 percent vs. September’s 11.2 percent, and more see a decrease, 19.5 percent vs. 19.3 percent. These results are uncomfortably close to the worst levels for this reading in 40-plus years of data. Buying plans all decreased, down for cars, homes and appliances. (LD’s emphasis)

[Chart]

Typically retail sales will move in tandem with consumer optimism – although not necessarily each and every month.

Over and above this review from The WSJ, I found a piece of data in this morning’s Financial Times to be of real interest, as well. John Authers writes The Short View:

While Asia is overheating, the confidence of the US consumer remains mired in depression. Usually, the Conference Board’s consumer confidence survey tends to follow the stock market. When stocks do well, consumers are more optimistic, and vice versa .

But despite the rally in stocks, consumers’ assessment of the present dropped last month to its lowest level since 1983, according to the survey, while optimism for the future dipped sharply. Both were nasty surprises for the market. Main Street still fails to see the reasons for optimism that have captivated Wall Street.

So Asian economies are already at the point where overheating is the main danger, while US consumers, for all the money thrown at them, are still not feeling any better. This is not encouraging.

Let’s return to my original question. While certain stocks may look extremely attractive at prices down 10-15%, would you be surprised if the overall market declined by that amount?

Comments and color always appreciated.

LD

  • Petricone456

    If the S&P 500 finished 2009 at 950, about a 10% decline from current levels, the index would still be up 5% for the year. By historical standards, that’s not too bad!

    In response to your observations on confidence in this country, the WSJ just noted that results of a proprietary survey conducted a few days ago show for the first time in Obama’s Presidency that a majority of those polled feel the country is on the ‘wrong track’.

    Wouldn’t shock me to see that pull back.

  • lizzy

    The Obama Administration has been so adept at massaging and manipulating data that almost nothing is to be believed. Even if the market maintains current levels the DOW is down by 4000 points. If these levels are the illusions I think they are, there are worse drops to come. People are reacting to these losses plus loss in value to real extate. I don’t buy a “jobless recovery”; I am looking for my space ship get away car. No confidence from this consumer.

    • Larry Doyle

      Lizzy,

      Save me a seat in the getaway. At some point, the clock strikes twelve and reality sets in.

      Hope you’re doing well…

  • Petricone456

    I didn’t know I’d get 10-15% of the pull back today!

    • Larry Doyle

      Petricone456…this is the first legitimate correction in the market since early July when we got down to 870-880 in the S%P 500.

      The market is LOOOONG overdue for an honest correction.

  • TeakWoodKite

    I am of the opinion that the low was not the bottom and current markets are artificial. I would expect a dramatic downturn decline from this market. The market gyrations are starting again.

    I wish I was less sceptically but with a market swimming in it’s own “waste”, there are only few options. The demands made on this economy by this administration and it’s corporate welfare programs are still with us.

    Small business is tanking worse than I can recall in all my years of memory. I would not be surprised at 30 percent decline in the next 9 months.

    Be well LD.






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