Why this week’s key releases seem more about expectations

Part 3
Why this week’s key releases seem more about expectations (Part 3 of 9)

Consumer confidence hits a 6-year high, shaping bonds and stocks

Consumer confidence

The Conference Board’s Consumer Confidence Index release for March was released on March 25. The headline index, measuring consumer sentiment, rose to 82.3 in March from 78.3 in February—the highest since January 2008.

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What is the Consumer Confidence Survey?

The Consumer Confidence Survey is a monthly report issued by the Conference Board that assesses how consumers rate current economic conditions. The survey is an assessment of prevailing business conditions and likely developments for the months ahead. The monthly report also mentions consumer attitudes and buying intentions. The survey is based on a probability-design random sample, and is conducted for The Conference Board by Nielsen, a leading global provider of information and analytics around what consumers buy and watch.

Consumer optimism rebounds in March on future prospects for jobs and the economy

Though consumer sentiment surged to a six-year high, consumers’ assessment of current conditions didn’t change much. Respondents who held that business conditions are “good” increased to 22.9% from 21.2%. But those claiming business conditions are “bad” also rose, to 23.2% from 22.0%.

The current labor market assessment was slightly unfavorable. Those claiming jobs are “plentiful” declined by 0.3% to 13.1% in March from 13.4% in February. Also, respondents saying jobs are “hard to get” increased marginally, to 33.0% from 32.4%.

The index measuring consumer expectations over the next six months rose to 83.5, the highest level since September 2013. Consumers expecting an improvement in business conditions over the next six months increased to 18.1% from 17.3%, while those expecting a decline in business conditions fell to 10.2% from 13.6%.

Consumers were also more optimistic about job prospects, with those expecting more jobs in the next six months moving up to 13.9% from 13.7%, while respondents expecting fewer jobs fell to 18.0% from 20.9%. However, respondents were less upbeat on future income growth, with the proportion of consumers expecting their incomes to grow declining to 14.9% from 15.8%, and those anticipating a decline in their incomes also decreasing, to 12.1% from 13.4%.

Why is consumer sentiment an important economic indicator for investors?

Consumption expenditure is the largest component in the country’s gross domestic product (or GDP), accounting for over two-thirds of the economy. Other factors remaining constant, an increase in the consumer confidence indices would imply that consumption expenditure would get a boost and gross domestic product (or GDP) would grow. Consumers who are optimistic about their economic environment are more likely to make purchases and incur debt on capital purchases than pessimistic consumers. The multiplier effect from an increase in consumption expenditure would also benefit the whole economy.

Increases or decreases in consumer sentiment would affect discretionary consumption expenditures. One ETF that invests in the consumer discretionary sector is the State Street SPDR S&P Retail ETF (XRT), which is composed of the retail sub-industry portion of the S&P TMI. The top ten holdings in XRT include national retailer Walgreens (WAG), apparel retailer Abercrombie & Fitch (ANF), and travel website TripAdvisor, Inc. (TRIP).

However, increasing consumer sentiment may have the opposite effect on bond investors, as an increase in GDP growth usually means higher interest rates. Investors can mitigate this interest rate risk by investing in floating rate-fixed income ETFs like the Market Vectors Investment Grade Floating Rate ETF (FLTR). Inverse bond funds like the ProShares Short 7–10 Year Treasury Fund (TBX) provide the inverse return of the underlying benchmark index.

To learn about another important consumer-related indicator released on Tuesday, March 25, read on to Part 4 of this series.

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