Headlines over the last few days have been gushing about consumer confidence having hit a five-year high, after back to back 10% increases the last two months. This is either a factor of or a factor to the stock markets having hit all time highs; regardless, it seems that people are again in consumption mode. The cyclical nature of the US stock market is beginning to feel like a game of Hungry Hungry Hippos where instead of consuming plastic marbles it is disposable crap and the stocks tied to it and instead of hungry hungry hippos doing the consuming it is people with extreme cases on amnesia. What surprises me the most in all this is that these reports are being trumpeted as excuses for the market being “different this time”, like Saddam Hussein, “it can change“.
What about the Tax Increases?
What scares me the most is that there has been a dearth of articles pointing out that all these increases in consumer confidence come amidst the 2013 Payroll Tax Increases. While Conference Board Director of Economic Indicators Lynn Franco mentioned it in a statement, “Back-to-back monthly gains suggest that consumer confidence is on the mend and may be regaining the traction it lost due to the fiscal cliff, payroll-tax hike, and sequester,” this feels more permissive than analytic. The tax hikes have hit and for most it will take more than a few months to sink in–I would wager most people, particularly the middle class (who have their pay auto debited), don’t even look at their paychecks in any detail. They will discover the impact of the tax hikes as the average balance in the bank accounts gradually shrinks like their retirement prospects. Bear in mind the tax hikes, for most, aren’t huge on a single paycheck basis.
The point is that this feels like the market effecting consumer confidence, rather than consumer confidence effecting the market. With this type of causality, which is inverse classical economic thinking, a aura of bad mojo feels prevalent. At least to us.
Headed for Disappointment
After the last decade it is hard to imagine all of this turning out well. Predicting the market and consumer confidence is starting to bear a lot of similarity to predicting the outcome of the next Hangover movie: there will be a lot of hype and build up, and then ultimately disappointment and the understanding that Zack Galifianakis plays the same character in every role. Consumers are more optimistic about business conditions (18.8% believe business conditions are good, and increase vs. April), and 10.8% believe jobs are plentiful (up from 9.7%). At the same time, investors have bid the market above GDP (check out http://www.gurufocus.com/stock-market-valuations.php, great site). It is hard not to feel that we have dated this market before, except last time the bitch had a nicer house.
I know this departs a bit from the “personal finance” angle. This is important stuff though: if you save, you should invest, and if you invest you should pay some attention to the market conditions. How do you feel about the current market conditions?
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