In this episode of “Investment Management Foundations,” Wealth Enhancement Vice President of Portfolio Consulting Gary Quinzel details the Consumer Confidence Survey, a timely index that pulls in various data points, including labor data, inflation, and GDP, to provide a comprehensive view of current economic conditions and how investors feel about them.

VIDEO TRANSCRIPT BELOW

Hello, everyone, and welcome to “Investment Management Foundations.” My name is Gary Quinzel, Vice President of Portfolio Consulting at Wealth Enhancement Group. Today's topic is consumer confidence and the markets. A recent Consumer Confidence Survey rose after three straight months of declines. The Consumer Confidence Survey, in their own words, reflects prevailing business conditions and likely developments in the months ahead. The report details consumer attitudes, their buying intentions, expectations for inflation, stock prices, and interest rates. So, this begs the question, “Does consumer confidence actually affect the market, and if so, in what ways and to what degree when it comes to stock prices?” Price is generally determined by two things: the earnings the company can produce, and the multiple an investor is willing to pay to own some of those earnings. That multiple is largely driven by a lot of sentimental factors, such as their personal approaches to risk taking, their feelings about the economy, maybe fear of missing out—all of this drives how much someone is willing to invest or pay for something.

Some individuals believe that consumer confidence can be a leading indicator of economic activity. As the survey digs into consumers’ overall assessment of their financial situation, their likelihood to buy an appliance or a car, their assessment of their own personal jobs. All of this impacts consumer spending, which makes up over 70% of GDP. Consumer confidence is also a very timely index, and that it reflects how consumers feel about current economic conditions. Unlike many other economic statistics and indicators that are released many months after the fact, consumer confidence is generally released in the same month. It surveys and takes into consideration both present and expected observations.

We have on the screen here a chart which breaks down consumer confidence into the present situation and the expectations index. The present situation index is based on assessment of current business and labor market conditions. And we can barely see that it's just notably increased in the last month, but it's actually been on a little bit of a decline for the last few years. The expectations index, which is in yellow, has been on a more steady decline for several years. It very slowly increased, but it's been on a notable decline. The expectations index is based upon consumer short-term outlook for income, business, and labor, and it's been below the level for some time now, which historically signaled that a recession was coming.

Now, the other big takeaway as we look at these charts is, does this correlate to what the market does over the long run? Well, we can see that it really doesn't have a direct tie into what the S&P 500 does. But, it does give you a good aggregate indication of all these different indicators that we just discussed. So, it's an important indicator because it reflects in real time how consumers feel about the economy, their personal situation, their job, and their expectations to spend. And it's a great way to incorporate labor data, inflation, and GDP all into one index.

Two of those components, inflation and labor, are what the Fed is looking at as it determines its next rate move. As of today, it still appears that the next move is going to be down. But of course, the timing and magnitude of that rate cut is still quite uncertain. So, in conclusion, the Consumer Confidence Survey is a good aggregate indicator, and it pulls in all this different data and tells us about that sentiment of consumers and what they're thinking at the time. But over the long run, we know that the market is largely driven by fundamentals. We hope you found today's episode helpful, and tune in again for the next episode of “Investment Management Foundations.” Thank you.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances. Investing involves risk, including possible loss of principal.