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The February reading of consumer confidence rebounded sharply from depressed levels in January fundamentally supporting the move higher in the equity market.
With a very weak reading in consumer confidence in January, the equity markets and this important economic indicator were potentially diverging for the first time this cycle (see our article outlining this divergence). However, the latest reading for consumer confidence in February is showing that the indicator has rebounded from what appeared to be seasonal year-end slack from the end of 2012; the new higher level in February is now in line with the higher levels of stock prices.
While there are two measures of consumer confidence, the Michigan University survey and the Conference Board survey of consumer sentiment, we estimate that the Conference Board has better fundamental underpinnings. The Michigan survey is a true qualitative sentiment survey whereby the University interviews 500 consumers about their spending habits and then indexes these responses. The Conference Board survey, however, is a more quantitative survey with a questionnaire concerning an assessment of current business conditions, an appraisal of current employment conditions, and a benchmarking tool on plans to make long-term purchases including automobiles and new homes. With less qualitative factors in the Conference Board survey, it stands to be a more reliable indicator.
With a substantial decline in the month of January, the Conference Board indicator and the stock market were potentially diverging for the first time this cycle (since the bottom of equity values in 2009). However, a strong rebound in consumer confidence in February is now flashing a healthier picture. After registering a 59.4 reading in January, a substantial decline from 66.7 in December, the Conference Board indicator rebounded sharply in February to 69.6. This 69.6 level in February was above many economist forecasts and was attributed to a continual improvement in weekly jobless claims and also a seasonally lower level in January due to fears about the impending Fiscal Cliff and other regulatory uncertainty coming out of Washington. Most importantly, our graph of the level of the S&P and Conference Board consumer confidence is now showing no major divergences which implies that the continued increase in equity values is being supported by a continued increase in economic fundamentals.
With a healthier reading and a continued directional relationship with the stock market, February’s confidence reading takes some worry out of the recent rally in stocks. As a result, investors can continue to consider buying equity related exchange traded funds (ETFs) including the iShares Russell 3000 Stock Index exchange traded fund (IWV), the Vanguard Total Stock Market exchange traded fund (VTI), and the iShares Core S&P 500 exchange traded fund (IVV).
© 2013 Market Realist, Inc.