Consumer Expectations Soar On Rising Stock Market

Consumer Expectations - Confidence Rises

The stock market is usually thought of as a reflection of the future economy. However, through the reflexivity theory, the stock market can cause changes to the economy. 

Volatility paired with the trade war and the government shutdown to take down consumer confidence and other soft data reports. Noteworthy due to weak December retail sales report and the deceleration in Redbook same-store sales in January and February. 

The consumer didn’t just say their outlook changed. There was a decline in spending growth. Declines in the expectation readings in the small business and consumer confidence reports were only temporary. 

The February Conference Board consumer confidence report improved significantly from January. The January report was revised higher from 120.2 to 121.7. Even so, the February index was much higher as it was 131.4. This beat the consensus for 125 and the high end of the expected range which was 127.5. 

Last time this report increased by about 10 points was in mid-2015 when there was volatility in the stock market.

Consumer Expectations - Stock Market Boosts Confidence

This leads us to the point that consumer confidence is severely impacted by the stock market. The upper class is impacted the most because it owns the most stocks. It also spends the most money, making it very important. Since 2009, the S&P 500 and consumer confidence have a 97.7% correlation and an r-squared of 95.4%.  

The fact that a declining stock market hurts consumer confidence which causes more declines and a rising market helps consumer spending. It pushes stocks higher, supports vicious moves. That explains why stocks fell so quickly in Q4 and rose so quickly in the past 2 months. 

The recession in 2001 was impacted by the tech bubble burst as without the lofty valuations these tech startups couldn’t invest in capex and hire new workers. That was one of the 2 recessions since 1950 that wasn’t catalyzed by a decline in real residential investment growth.

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