08/17/11   Consumer Sentiment At 31-Year Low

Editor’s Corner

Investor Heat Map: 8/17/11Consumer Sentiment At 31-Year Low

Ron Rowland

Negative trends still dominate market action despite a partial recovery in the last week.  A look beyond price data adds more context: the early August swoon was accompanied by the largest trading volume in more than a year, but activity was much lighter for the bounce.  The benchmarks will not enter autumn on a strong note without a big comeback, and very soon.

Plunging stock prices reveal the flip side of the “wealth effect” that marked the last economic boon.  The same consumers who spent money so freely when their 401k balances surged are now doing the opposite.  A preliminary reading of this month’s Thomson Reuters/University of Michigan Consumer Sentiment Index had a rare 2.5 standard deviations event, dropping sharply to the lowest level since May 1980.  Even though the U.S. is not technically in a recession, consumers clearly expect to face one soon. 

Europe is in even worse shape.  Growth in the Eurozone last quarter came out at only 0.2%.  More significantly, Germany’s growth was only 0.1%.  If the continent’s largest economy can manage only to stay stagnant, the lesser members of the currency union are toast.

The bond market is also signalling recession, with 10-year Treasury debt near 2.2%.  This is quite low for a non-AAA security.  Gold prices continue to march higher, though a little consolidation won’t be surprising.

Breaking out of the negative spiral is not getting any easier.  Pessimistic consumers pull back on their spending, which keeps unemployment high, which creates more pessimistic consumers.  The debt-ceiling debate in Washington along with hints from the Federal Reserve suggest that the economy may finally be left on its own.  We have no doubt a truly free market can find a way out.  Unfortunately, any solution will be painful for many.


As gloomy as the sector rankings may look, they actually improved a lot since last week.  “Improved” does not necessarily mean “bullish,” of course.  Utilities took the top position away from Consumer Staples, which fell to second place.  If you own utilities, you may be losing less than anyone else who is still in stocks, but you’re still losing.  Furthermore, as noted by Investor’s Business Daily, “in a strong market, utilities wouldn’t be leading the charge.”

If anyone is optimistic about avoiding another recession, they seem not to be buying stocks.  The three sectors most dependent on economic growth, namely Energy, Materials and Industrials, are all lagging.  Those downtrends are exceeded only by Financials, where the banking mess seems to be entering a new phase.  Bank of America (BAC) lost more than half its value this year and is down nearly 85% from its peak.  In other words, an investor who bought BAC at the high needs to make more than 500% from here to get back to break-even.  We suppose it could happen, but don’t hold your breath.

Health Care, Telecommunications and Consumer Discretionary form the middle of the pack, as they did in our last report.


Last week we noted that the Style rankings were neatly arranged from large to small, except for Micro Cap in the middle.  That anomaly is now gone; Micro Cap fell to last place.  The orderliness doesn’t end there, either: each capitalization segment is further stratified into Growth, Blend, and then Value.  As in sectors, any signs of strength are only relative.  The best (Mega Cap) has only been half as bad as the worst (Micro Cap), but even the best still looks dismal.


Japan didn’t participate in the global bounce but still managed to stay on top of our Global chart for another week.  You may recall that Japanese authorities staged a currency intervention back on August 4 in reaction to a surging Yen.  The impact lasted all of one day and the Yen is now back at its pre-intervention level.  Canada moved up to second place thanks to recovery in commodity prices.  Third-place U.K. is reaping the benefit of avoiding the Euro currency.  China, Latin America, and the diversified Emerging Markets benchmark are all below average, and Europe (ex-U.K. and a few others) has a firm grip on last place.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

“When the people find that they can vote themselves more money, that will herald the end of the republic.”

Benjamin Franklin


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