Consumer Confidence and the Markets

Jan 22, 2008 12:15pm

Steep drops in the stock market historically have not had much short-term, direct influence on consumer confidence, for a simple reason: Most people simply haven’t seen market gyrations as having a lasting impact on their day-to-day personal finances.

While it’s commonly noted that most Americans own stocks, that includes indirect holdings through mutual funds and retirement plans. Far fewer own individual shares directly, especially when you exclude their own employer’s stock – just 22 percent in a Pew poll in fall 2006.

Most, moreover, are passive, long-term investors; last fall only 6 percent said they trade stocks or funds “pretty regularly,” no different than when we asked a similar question in the midst of the market meltdown of 2001. Buy and hold is the norm.

There’s also a good deal of built-in acceptance of market shifts. In a poll we did a few years ago, 69 percent called the stock market “risky,” and it’s been as high as 80 percent after the 2001 correction. Even then, in a poll we did in July 2002, just 17 percent said rises and falls in the market affect them “a great deal.”

This doesn’t mean market falls are painless. Plenty of people are hurt by drops in the price of shares, especially those who rely on the markets for income. For many others, though, these are paper losses offset by previous paper gains. Most seem to recognize that markets go up as well as down, and in the long run beat the heck out of passbook savings. And most are much more sensitive to more direct factors, such as incomes, inflation (e.g., the price of gasoline) and the job market.

The table below lists the largest one-day postwar drops in the Dow in percentage terms, and what happened to consumer confidence in the ensuing week and month. The answer: Not much. Even the Dow’s largest drop, 22.6 percent on Oct. 19, 1987, was immediately followed by a relatively meager 4-point decline in our weekly Consumer Comfort Index.

Shifts in the consumer index like those in the table – generally 2 to 4 points – are unremarkable. Over its 22-year history it’s fallen by 3 points in a single week 72 times and by 4 points 50 times. The CCI’s rarer, bigger drops appear unrelated to market events.

  Largest Postwar Percentage Drops in the Dow             Dow's      Change in ABC CCI   Date      decline   Week later   Month later 10/19/87   -22.6%     -4 points     -7 points   10/26/87    -8.0      -3            -3  10/27/97    -7.2      +1            +4 9/17/01     -7.1       0            -2  10/13/89    -6.9       0             0 1/8/88      -6.9      -2            -3

None of this is to say that the market is irrelevant to consumer views; confidence is worth closely watching in the weeks ahead. It’s simply to say that with history as a guide, the market’s impact on overall consumer confidence should not be overstated.

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