Can Consumers Lead the Market?

So what has stocks soaring now, during this great deleveraging — this credit crunch — this historic pullback in household balance sheets?

Consumer confidence, of course.

We recently vowed to stop calling our national brethren “consumers” in favor of less degrading words — like Americans, citizens or just plain-old people. Thus, we report the Conference Board printed a surprisingly optimistic gauge of American consumption attitudes (doesn’t that sound better?) yesterday. After two months of decline, the index kicked back up to 54.1, just shy of a 2009 high.

Coupled with the latest printing of the home price index, that was enough to keep this mega-bounce alive and kicking. The news shot the S&P 500 to a 1% gain within moments of yesterday’s opening bell, which eventually faded into a 0.25% advance. The index is up almost 4% in the last five trading days. The Dow hasn’t fallen for six days in a row.

We accept that improving consumption attitudes could bump stocks higher, especially retail. But we wonder… do consumption attitudes lead markets, or the other way around?

Consumer Confidence

Seems like Joe Six-pack is routinely late to the party, no? We blew the post Lehman crash, stayed gloomy during the best of the stock rebound, got bullish in June when stocks went nowhere and lost confidence last month when the market shot up again.

So what does a big improvement in consumption attitudes tell us now? If anything, that the stock rally is about to cool off.

“Retail is a terrible business to be in during a recession,” says Dan Denning, belaboring an obvious idea that seems lost on the world right now. “Don’t forget the primary economic and social trend right now: People are reducing their debts. They are cutting back, becoming more frugal and learning to live within their means.

“Of course, we think this is happening. But it could be totally wrong. Maybe the credit cards are finding their second wind and consumers are gearing up for one last credit bender. But our suspicion is that you are in the middle of a generational/cyclical shift in the attitudes toward debt and that this is generally bad news for retail stocks.”