Money managers looking for indicators that the stock market will keep rolling for the second half of 2017 only need to look at the “confidence” barometers – specifically, consumer and business confidence.
“Right now, consumer and business confidence show resilience,” said Jason Pride, director of investment strategy at Glenmede Trust Company in Philadelphia. “Fundamental data globally points toward an ongoing expansion.”
While political gridlock is a big issue marketwise, “the economy and markets remain resilient in the face of policy uncertainty and political gridlock,” he added.
For sure, a big reason for that scenario is that consumers are bullish on the U.S. economy these days – especially on the consumer side of the equation.
“Consumer confidence increased moderately in June following a small decline in May,” said Lynn Franco, director of economic indicators at The Conference Board, a business research association.
Consumer confidence is at a nearly 16-year high, she said.
“Expectations for the short-term have eased somewhat, but are still upbeat,” Franco said.
“Overall, consumers anticipate the economy will continue expanding in the months ahead, but they do not foresee the pace of growth accelerating.”
That’s good news for the stock market, which has already enjoyed a robust first half of the year (the Dow Jones Industrial Average is up 10 percent through July). A strong consumer confidence sentiment would continue to tamp down volatility, which should increase market confidence, and gains, experts say.
“Valuation ratios are at an all-time high,” said Charles Trzcinka, a professor of finance at the Indiana University Kelley School of Business. “It’s not the time to jump in with full force. But there is no question that consumer confidence has been very good. The net effect has been a reduction in volatility – just see the VIX for the evidence.”
The VIX -- which measures the volatility index -- has inched up from -30 percent to -20 percent in the last month as consumer confidence in the U.S. economy has climbed.
The VIX is the “big mystery” of the Trump administration to date, Trzcinka said.
There’s also a school of thought that, seemingly no matter what the economic impactors, the stock market is going to chug along at a solid pace, anyway.
"The stock market has been on an unprecedented climb over the past seven-to-eight years, more than tripling in value from its 2009 recession low,” said Evan Tarver, investment analyst at FitSmallBusiness.com in New York City. “Consequently, to say that the market should see a positive jolt is accurate in that it's been setting all-time high records seemingly weekly.”
Be Wary of Faltering Confidence
Looking at current activity, consumer confidence, and the factors that drive it, are having a unique impact, Tarver said.
“The recent interest rate hike by the Fed is helping further increase consumer confidence,” he said. “Now, this consumer confidence is different than investor confidence, but typically when the consumer is confident, so is the investor.”
If consumer confidence falters significantly, look out below, Tarver warned.
“Looking at trends over the past 20 years, we seem to enter a recession about every eight years or so,” he said. “With the market being so high, a large faction of investors believe that we're approaching some sort of bubble or market correction. This will end up being true if consumer confidence begins to wane.”
However, with interest rates on the rise and quantitative easing seemingly over, it's more likely that the market will continue to grow as consumers spend more of their discretionary income, Tarver predicted.
Given the split in market sentiments among prominent analysts, it should be no surprise if the Dow gains 10 percent this year, declines by 10 percent, or remains stagnant, he said.
“This is the current state of our market, one of confusion, seeing as we've never seen values this high,” he noted.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at firstname.lastname@example.org.
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