Are Consumers a Little Too Confident in Donald Trump?

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On Tuesday, the Conference Board released its important consumer confidence index with a new high. The index just barely surpassed the exuberance consumers were showing in July of 2007, just before the financial crisis kicked into high-gear.

Are Consumers a Little Too Confident in Donald Trump?

The Conference Board’s numbers showed that the increase in the index was almost entirely due to future expectations, which isn’t necessarily bad, but it does mean that confidence is rising based on an unknown (the future) rather than what is already known (the present). Future expectations tend to be more unstable for obvious reasons.

Attributing the rise in consumer confidence to the election of Donald Trump is probably reasonable. The index’s numbers show that most of the shift in expectations occurred among older respondents, which matches a demographic that leaned very heavily toward Donald Trump during the election. The gains in this portion of the sample population offset the negative outlook in the report from job-seekers.

Post-election euphoria may help explain the spike in confidence, but like the superficial similarity to 2007, it shouldn’t be dismissed automatically as a temporary effect. A positive shift in sentiment is a required component for economic growth. However, we also can’t ignore the significant unknowns that overhang 2017.

Part of the reason we feel a little wishy-washy about the data is that it conflicts so dramatically with international measures of consumer confidence. Confidence in the U.K. is negative, and German indices are flat. Peripheral economies in Europe have uniformly negative or falling confidence numbers.

The cracks in confidence in Europe are relatively small compared to unofficial measures in China and the rest of Asia. As you can see in the next chart, Asian consumers and small businesses are driving the value of Bitcoin significantly higher as they seek protection from currency controls and inflation again.

Bitcoin versus USD: Chart Source — TradingView.com

Bitcoin versus USD: Chart Source — TradingView.com

But what about consumer confidence’s relationship to spending? These two measures are positively correlated and, if confidence is misleading right now, it will show up in spending numbers.

After a troubling November, investors should feel a bit better about spending in December. New data released this week from retail trade groups show that an end-of-December spending spike overcame earlier weakness and spending should be up on a year-over-year basis when we get the official numbers next month.

If consumer spending starts to match confidence, we expect durable-goods-makers/retailers to see some of the most significant benefits. Appliance-makers like Whirlpool Corporation (NYSE:WHR) look good, along with home-improvement stores. We also expect Amazon.com, Inc. (NASDAQ:AMZN) to continue benefiting disproportionately from rising spending.

Department stores still look bad regardless of spending, however, as they discount products, such as women’s apparel, that have languished in December. Companies like Nordstrom, Inc. (NYSE:JWN), J C Penney Company Inc (NYSE:JCP) and Macy’s Inc (NYSE:M) will likely continue struggling.

Consumer confidence is being driven by future expectations, which is good, but it doesn’t mean that spending will automatically follow. November and early December spending numbers were slow, and international consumers are still exhibiting weakness.

There are a few signs of improvement in North America, however, with a last-minute retail push that should benefit online retailers, home-improvement chains and durable-goods-makers.

InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.

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Article printed from InvestorPlace Media, https://investorplace.com/2017/01/consumers-consumer-confidence-spending-donald-trump/.

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