September 27, 2020

Washington Deadlock Hurts Consumer Confidence

Consumer confidence in the first half of December took a sharper-than-expected dip, falling to its lowest level since August, according to a new survey released Thursday by the Conference Board. Wall Street also registered its frustration with the stalemate in Washington on Thursday, sending stocks sharply lower before recovering late in the day.

The gloom comes despite signs the economy has been holding up recently during the rising worries — other data released Thursday showed a healthy gain in new-home sales and a slight drop in new jobless claims. Indeed, the Conference Board’s data show consumer anxiety is centered on the outlook ahead for the economy, rather than on current conditions.

“People are realizing that we may not get a compromise and they’re getting nervous,” said Guy Berger, United States economist with RBS Securities. “It’s a precarious situation. So far consumers are worried about the future. Once they start worrying about the present, we’re in trouble.”

If Congress and President Obama cannot agree on a deal to cut the deficit by Jan. 1, more than $500 billion in tax increases and spending cuts are set to take effect.

Taxes have been the main sticking point — while the president favors eliminating Bush-era tax cuts on incomes over $250,000 and preserving current rates for lower incomes, many Republicans have been wary of supporting any tax increase. Republicans have been pushing for deeper spending cuts, something many Democrats have resisted.

Both sides remained dug in, and at midday Thursday Senator Harry Reid of Nevada, the Democratic majority leader, said he thought it was unlikely a compromise would be reached before Jan. 1.

With Wall Street tracking every turn of negotiations in Washington, shares tumbled after Mr. Reid’s remarks but recovered later in the day after reports the House would reconvene Sunday and take up the issue. The Standard Poor’s 500-stock index fell 1.73 points, to 1,418.10, while the Dow Jones industrial average sank 18.28 points, to 13,096.31

While an eventual deal that blunts part of the effect is expected in the coming weeks, some fallout from missing the Tuesday deadline will be felt right away — including a two percentage point increase in payroll taxes as well as the end of unemployment benefits for more than two million Americans. All that has increased the uncertainty for individuals, who until recently had shrugged off the fiscal standoff in Washington.

“Expectations have certainly shifted and it seems like consumer attitudes have caught up with business confidence,” said Michael Griffin, executive director at Corporate Executive Board, a member-based advisory firm. Surveys by the group have shown business sentiment weakening for three consecutive quarters, he said.

Consumers have had reasons to be more optimistic lately. After a deep decline caused by the housing bubble, home prices have begun to recover in many parts of the country. And the job market has been showing signs of improvement, with unemployment hitting a four-year low of 7.7 percent in November.

On Thursday, the Labor Department reported that initial claims last week for state unemployment benefits fell by 12,000, to a seasonally adjusted level of 350,000. Figures for jobless claims have been volatile since Hurricane Sandy, but the four-week moving average for new unemployment claims now stands at its lowest point in nearly five years. Sales of new single-family homes in November rose 4.4 percent, to a seasonally adjusted annual rate of 377,000, according to the Commerce Department.

By contrast, the Conference Board’s consumer confidence index fell to 65.1 in December from 71.5 in November. That was much sharper than the 1.5 point drop economists had been expecting. The board’s expectations index was off more sharply, sinking to 66.5 from 80.9 in November.

Several economists said the current situation recalls the standoff over raising the federal debt ceiling in the summer of 2011. In that case, too, consumer confidence eroded as both sides in Washington refused to blink until the last moment, but experts added the consequences were likely to be longer-lasting this time because the changes in tax policy affect individuals directly.

“In a lot of ways, this is a replay of the summer of 2011,” Mr. Berger said. “But it’s more serious this time.”

The longer the stalemate continues, the deeper the damage, economists said.

“It takes a while for consumer confidence to go up but it takes just a short while for consumer confidence to go down,” said Chris G. Christopher Jr., senior principal economist at IHS Global Insight. “The fiscal cliff has put a damper on things, and retailers are going to feel it in December.”

“As we get closer to Jan. 1, and the political rhetoric gets ramped up, people get worried,” he said.

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Common Sense: Three Experts Prognosticate on 2012

Predictions for the economy and markets for 2012 have been bleak, and 2011 was much worse than expected. There may not be much to celebrate this New Year’s Eve.  

That may be good news, at least for investors.

The last time things looked this bad — even worse — was three years ago, hard on the heels of the bankruptcy of Lehman Brothers, with global markets plunging and the financial crisis still unfolding. The following year the Standard Poor’s 500-stock index gained a robust 23.5 percent.

What explains the paradox? Efficient market theorists would say that all the bad news and pessimism about the future are already reflected in stock, bond, real estate and other asset prices. Market prices are in large part predictions, not snapshots of the present. So-called contrarian and value investors, like Warren Buffett, have argued that pessimism is often overweighted in asset prices, which makes widespread gloom a bullish indicator. Mr. Buffett went on one of his largest stock buying sprees this last year, even as the economic news worsened.

These views have been validated by recent research in the field of behavioral economics, which suggests that investors tend to be unduly influenced by recent trends, both good and bad, and project them into the future. Of course, if pessimism over 2012 turns out to be well founded, or if things turn out even worse than expected, then even depressed asset prices will fall further. The trick is to identify conventional wisdom that’s wrong, or at least unduly pessimistic. So I asked three widely followed experts in their respective fields — United States stocks, fixed income and real estate — who have successfully embraced contrarian views (at least most of the time) for their advice for 2012.

Bill Miller:
‘Buy and hold is not dead’

Last month the well-known mutual fund manager Bill Miller announced his retirement as portfolio manager for the Legg Mason Value Trust, a mutual fund that made history by beating the S. P. 500 for a record 15 consecutive years. He was named fund manager of the decade by Morningstar in 1999. But no one is infallible, and Mr. Miller stumbled in 2008 by betting on a recovery in United States financial stocks that never happened.

His fund has now trailed the S. P. 500 for five of the last six years. His ill-timed bet on financial stocks illustrates the peril of being a contrarian when the conventional wisdom turns out to be correct, but Mr. Miller’s record winning streak still stands (and he’ll continue to manage Legg Mason’s Opportunity Trust mutual fund).

Like many contrarians right now, Mr. Miller is bullish on stocks. “A great deal of pessimism is already built into the U.S. equity market,” Mr. Miller said when I caught up with him late this year.  “The market is trading at 12.5 times earnings. Basically, the market is expecting no growth in corporate profits from here indefinitely. The S. P. 500 dividend yield is higher than the 10-year Treasury yield. This only happened at the bottom of the financial crisis, and before that you have to go back 50 years.

“After two years of headlines on Europe, beginning with Greece, my view is, everything about Europe is discounted except the complete collapse and disintegration of the European Union,” Mr. Miller continued. “Everything but the worst-case scenario is baked in. Recession? Yes. Political dysfunction? Yes. Bad austerity policies when they need to promote growth? Yes. Those are in the headlines every day and it’s priced into U.S. stocks. I’m not so sure about European stocks.”

Mr. Miller is enthusiastic about large-capitalization, high-quality United States stocks. “Contrary to what appears to many to be the case, the U.S. economy has been accelerating. We’ve had good growth, and it’s improving.” After a decade in which the S. P. 500 was essentially flat, “people think the only way to make money is to allocate tactically and trade a lot. Now everyone wants to be a global macrotrader. I wouldn’t let anyone do this. I’d rather get some high-quality companies that have never been cheaper. I’d buy and hold. Buy and hold is not dead.”

Bill Gross:
‘A deserted asset class’

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Economix Blog: When Confidence Is Lower Than the Economy Itself

Distrust in government is at its highest level in recorded history. Americans are worried that the economy is cratering. Protesters in the Occupy movement are voicing the frustrations of an increasing number of people.

There is no question that these sentiments reflect a grim reality: the poverty level is up. Inequality has grown exponentially since the 1970s. The European debt crisis remains unresolved. Unemployment is stuck at 9 percent, and if you count the people who have either given up looking or those who have taken part-time jobs because they can’t find full-time work, close to one in six people is underemployed.

Yet by at least one measure, how people feel seems disconnected from how things are. Consumer confidence is back down to lows last seen during the depths of the Great Recession, despite the fact that the economy is still, believe it or not, growing.

On Thursday, the Commerce Department will announce its estimate for economic growth in the three months from July through September. The consensus is now for an annual rate of 2.5 percent. Although that’s certainly not enough to bring down the unemployment rate significantly or increase middle-class incomes, it does suggest that the economy is not currently on the cusp of a double-dip recession.

Yet consumer confidence, as measured by both the Conference Board and the University of Michigan/Reuters index, is down to lows last seen in the fourth quarter of 2008, when the economy actually contracted at an annual rate of 9 percent.

It’s possible that the dip in confidence is a precursor of an actual pullback in spending that would, in turn, push economic growth down. But for now, actual spending does not seem to reflect the gloom that people feel. Chain store sales are up, as are auto sales. Part of the reason car sales have risen is that the supply chain disruptions caused by the Japanese earthquake and tsunami have receded. But people still have to buy the cars that are being produced.

Cars are usually bought on credit, which means buyers are committing to a stream of payments into the future. The fact that consumers are purchasing autos, said Ben Herzon, senior economist at Macroeconomic Advisers, “suggests they are not feeling as glum as they are reporting.”

It is not unprecedented that consumers would feel much worse than they actually behave.

According to the Conference Board, people do take longer to recover from a recession than the official economic metrics, in part because companies do not tend to create a lot of jobs until they are sure that growth is going to last. “The labor market has a significant impact on confidence readings,” said Lynn Franco, director of the consumer research center at the Conference Board.

So between 1991 and 1994, confidence zigzagged up and down. Twice during 1992, a year after the recovery had begun, confidence dipped as low as it had been during the recession. And in early 2003, a year after growth had resumed following the 2001 recession, consumer confidence fell to a far lower level than it ever reached during the recession.

The gap between perception and economic growth this time around also has to do with jobs. Employers are simply not creating them fast enough to instill optimism. On top of that, political brinkmanship over the debt ceiling in Washington, the Standard Poor’s downgrading of the United States credit rating in August, and vast swings in the stock market have rocked confidence.

In fact, stock market volatility may be playing a larger role in the consumer mind-set than it has in the past. After Black Monday in 1987, when the Dow fell more than 22 percent in one day, the University of Michigan/Reuters index of consumer expectations, which records how consumers feel about their economic futures, fell just 7.7 points, said Ian Shepherdson, chief United States economist at High Frequency Economics. Since May of this year, that index has fallen more than 20 points.

And let’s face it, even at 2.5 percent growth in gross domestic product, no one would call that firing on all cylinders. The amount of time it is taking to recover from the financial crisis is throwing everyone.

“This recession, followed by sluggish recovery, is not the experience of pretty much anyone today,” Mr. Shepherdson said. “So for all intents and purposes nobody in America has any experience for an economy behaving like this. Economists don’t even understand it.”

He added: “So if people don’t really understand what’s going on in the economy, how can they frame reasonable expectations of where it’s going?”

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Mutual Funds Report: Second Quarter

This Time, Japan’s Gloom Runs Deeper

Japan’s earthquake, tsunami and nuclear crisis have made the clouds over its economy darker than usual — and any silver lining harder to find.

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