There is nothing showing up in economic reports or surrounding conditions to lift either investor or consumer confidence, which is therefore at record lows. But, could that be a positive in itself?
Home sales and home prices continue to decline. Job losses and unemployment continue to rise. The stock market is down to its level of 1997, having wiped out 12 years of gains for buy and hold investors. A share of CitiGroup now costs less than a cup of coffee. The stock market has now declined for six straight months, something it did not do even in the granddaddy bear market of them all of 1929-32. Politicians and the media continue to beat up on the government’s efforts to rescue the situation, and seemingly for good reasons. The government is going to take a 36% stake in the ownership of CitiGroup as one of its moves to rescue the banking system. But the even larger takeovers of insurer AIG, and mortgage lenders Fannie Mae and Freddie Mac by the Bush Administration last September have not worked. Why expect this takeover to be different?
So it’s no surprise that the University of Michigan reported this week that its Consumer Confidence Index declined from its extremely low level of 61.2 in January, to 56.0 in February. That’s almost at its record low, which was recorded in 1980, when the economy was struggling to come out of the deplorable 1970’s plunging economy and spiraling inflation (stagflation). The confidence index dates back to 1952, so if it’s almost at its record low, consumer confidence is currently lower than it was in the severe recessions of 1981-82 and 1973-74.
And for investors, the level of pessimism and fear is so obvious it hardly needs to be measured, but it is confirmed by the data.
For instance, the poll of its members by the American Association of Individual Investors is considered to be at extreme pessimism whenever the poll shows bearishness has risen to more than 55%, and bullishness has dropped below 25%. In last week’s poll bearishness had risen to 56.7% bearish, and bullishness had dropped to only 21.7%, and in this week’s poll 55.1% were bearish, only 24.3% bullish. Similarly, the VIX Index, also known as the Fear Index, is currently showing a considerably higher level of investor fear than at the bottom of any of the legs down in the 2000-2002 bear market.
Yet, contrary to what those who have lost jobs or homes may feel, the current recession (7.6% unemployment) is still considerably less severe at this point for consumers than were those two worst recessions since the 1930’s.
And for investors, the stock market has already tumbled more than it did in those two bear markets when the severity of those recessions were being factored into stock prices.
Could it be then that the gloom and doom has gotten ahead of itself for both consumers and investors, and is due for at least a temporary bounce?
It’s easier to see that potential for investors than for consumers, as there is a long history of extreme bearish sentiment being present at stock market lows. Investor sentiment is an important tool of professional and institutional investors, in that high levels of investor euphoria are taken as a warning that a market top may be near, while extreme levels of pessimism are taken as a sign a market bottom may be near.
Sentiment was certainly an important tool in helping us keep subscribers on the right side of the market in both the 2000-2002 bear market and the current bear market (we were one of the very few advisory services that was up for the year last year).
And right now the level of pessimism and fear has our attention again.
Is there anything going on that might spark at least a temporary psychological lift?
On my daily blog I mentioned an interview in Asia last week in which a foreign market analyst was asked when he thought global markets would be able to recover. His answer was that it is up to the U.S., that its problems are driving global economies. And he said the problems in the U.S. have changed considerably, are now “50% economic, and 50% psychological, and the psychology aspect is not being addressed, but needs to be”.
And last week we did see the Dow actually close up on Tuesday, and by 236 points, on a day when Fed Chairman Bernanke testified before Congress, due to a change in his presentation. After going through his typical dreary rehash of all that has gone wrong over the last two years, he actually offered some potential hope, by saying the Fed expects the recession to bottom later this year and begin to recover next year.
Later Treasury Secretary Geithner also offered some optimism, saying in an interview that the rescue plans will “definitely work.”
So far the media is laughing at the new attempts to insert some optimism into the mix.
But, these are ‘blood in the streets times’, when historically extremes of pessimism do reverse, at least temporarily. And after a record six straight months down investors deserve a respite.