A Confidence Boost for the Markets

May's reported surge in the Conference Board's consumer confidence index was larger than expected

by BW Staff

With gloomy headlines ranging from the geopolitical (North Korea's nuclear test) to the housing sector (further declines in the U.S. S&P/Case-Shiller home-price indexes in March), what the stock market needed on May 26 was a quick pick-me-up. Voilà! A surprising jump in the Conference Board's consumer confidence survey in May helped lift U.S. equities out of the doldrums, with the Dow Jones industrial average up over 100 points in midmorning trading after opening the session in negative territory.

BusinessWeek rounded up comments from Wall Street economists and strategists on the surprising confidence boost and other hot topics on May 26:

Michael Englund, Action Economics

[The headline consumer confidence] index soared to 54.9 in May from 40.8 (was 39.2) in April, 26.9 in March, and an all-time low of 25.3 in February. With this third consecutive monthly gain from the record low, the index is finally back above the trough-readings in prior cycles of 47.3 in February of 1992 and 50.1 in May of 1980. Today's reported surge in U.S. consumer confidence in May as gauged by the Conference Board index was larger than expected, and reversed the prior downside overshoot in this confidence measure through February that arguably outpaced the declines in other measures, and that left a remarkable new record low for this measure.

This, alongside today's reported pop in the Richmond Fed index to 4 in May from -9 April, starts the week off with a positive spin for the U.S. economy, though the 2.2% drop in the S&P Case-Shiller index in March reveals that [home-price] declines here showed little sign of abating in the first quarter.

Richard Bove, Rochdale Research

The decline in the value of the dollar is not being viewed as a major event by the equity markets. For bank investors, it is very important since the dollar is the raw material of the banking business. A continuous decline in its value would lower bank stock prices and create a much different financial world. Therefore, there may be some value in thinking about the currency and the recent influences upon it. The key point is that the value of the dollar cannot be allowed to fall too precipitously or the crisis of 2008 will recur. The gains made in salvaging the financial system will be lost. As best I can determine, however, it does not appear that the value of the dollar will crack to a point which would be dangerous to the markets or to bank stock prices. One fact worth considering, however, is that it may be that the role of the banks, at present, is not to increase lending to the private sector but to help fund the government deficit. In the process of doing this they will increase their earnings in an economy that will struggle to grow at more than 1% annually.

Marc Chandler, Brown Brothers Harriman

Fed Vice-Chairman Donald Kohn, at weekend conference at Princeton University, said the Fed's purchases of Treasury and Government-Sponsored Enterprise (GSE) securities may have helped hold down long-term rates as much as 100 basis points and could boost nominal gross domestic product by $1 trillion. This would seem to underscore possibility the Fed increases the purchases of long-term assets—and this is particularly relevant for Treasuries as the Fed's purchase program was to expire in August or September while purchases of GSE assets run until the end of the year. Kohn also suggested the multiplier impact on the economy could be higher with Fed funds near zero than in more normal times. Kohn suggested the multiplier could be as a high as 2x rather than 1x assuming that the stimulus is perceived to be temporary. Meanwhile, we suspect that by the end of the summer the Bank of England may request authority to buy more gilts.

Edward Yardeni, Yardeni Research

In London and Edinburgh last week, I test-marketed my Old-World-vs.-New-World investment thesis. The Old World includes the U.S., the U.K., the euro zone, and Japan. The billion people in these nations enjoyed rapidly increasing prosperity following World War II. Their standard of living may stagnate for a while as a result of the lingering repercussions of the financial crisis of the past couple of years. In the June 1 issue of Business Week, Pimco's CEO Mohamed A. El-Erian calls this "the new normal" for the U.S. He sees a protracted period of leverage, credit, and entitlement "exhaustion" in the U.S. with real GDP growing 2% rather than 3% and the unemployment rate falling to 6% over the next three to five years. Pimco's top man may be right.

However, investors should find plenty of growth to invest in around the world. In the New World, there are 3 billion people striving to achieve greater prosperity. They've had more opportunities to do so since the end of the Cold War in 1989 and since China joined the World Trade Organization in 2001. Some of my friends in the U.K. were skeptical that the New World could pick up the slack of the Old World soon enough to sustain a new global expansion. So they are not convinced that the recent extraordinary rebound in emerging stock markets and commodity prices is sustainable. But I am turning more optimistic on this issue.

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