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Consumers Losing Confidence

It should not be surprising to see that consumer confidence is waning and yet the market appears to have been caught off-guard by the magnitude of the recent decline in consumer confidence. While reports showing that growth in China is beginning to slow down may have contributed to the turnaround in the equity markets, the major culprit appears to have been the Conference Board’s consumer confidence reading for June which showed the index dropping from 62.7 to 52.9 – close to a 16% month over month decline! The drop even caught the experts by surprise as economists were expecting a reading of 62.8.

We, at Hennion & Walsh, can fully appreciate the consumer’s lack of confidence in a U.S. economy that is desperately trying to find its legs again. With a U-3 unemployment rate of 9.7% and a mounting concern that the existing U.S. economy will not be able to provide the amount of jobs necessary to get our country back to a point of full employment (which generally is viewed as a U-3 employment rate between 3-4%) for many years, it is hard not to join the growing camp of pessimists.

A poor consumer confidence number, in and of itself, is not a cause for great distress. However, consumer confidence is often viewed as a leading indicator of retail sales, which are driven by consumer spending. This is critical because consumer spending accounts for over 70% of U.S. economic growth, as represented by Gross Domestic Product (GDP). If consumers are not spending, retail sales are not increasing and the economy, as a result, cannot grow in any meaningful fashion.

While we view the likelihood of the U.S. heading toward a double-dip recession scenario as low at present, we do see many challenges ahead for not only the economy but also for the equity markets as the latter tries to find the catalyst for the next leg of this bull market. In fact, we still contend that volatility will likely stay at elevated levels for the balance of 2010 and we could see a series of starts and stops (i.e. pullbacks) throughout the remaining two quarters of the year due to consistent, conflicting economic data points and macro-political uncertainties.