By Nick Godt
With a second survey in less than one week showing consumer confidence falling, some strategists believe that investors' market expectations are running well ahead of economic realities and that a wake-up call might come after earnings season.
Since the flow of corporate results started in early July, the broad S&P 500 index (SPX) has rallied 11%, with investors focusing on a large number of key results that have easily topped lowered market expectations.
But critics have signaled that many of the positive surprises have been based on cost-cutting measures while few firms have signaled any improvement in business conditions. And consumers' willingness to spend remains key to that process.
"Investors have moved away from the here and now and are concentrating on the idea that things are going to improve eventually," said Dan Greenhaus, market strategist at Miller Tabak.
"But consumer confidence numbers are dropping in part because of future consumer expectations and investors should be heeding the warning," he said.
On Tuesday, the Conference Board said U.S. consumer confidence fell for a second month in July, underscoring still-gloomy sentiment about the U.S. economy.
The index dropped to 46.6 in July from an unrevised 49.3 in June. In May, the confidence gauge stood at 54.8.
Partly in reaction to the report, the Dow Jones Industrial Average (DJI) was down 48 points, or 0.5%, at 9,059, while the S&P 500 fell 7 points, or 0.7%, to 975 and the Nasdaq Composite (RIXF) lost 3 points, or 0.2%, to 1,964.
The consumer discretionary sector of the S&P 500 fell 1%, weighed by an 18% slide in shares of office retailer Office Depot (ODP), which posted a much wider-than-expected second-quarter loss, citing continued weakness in consumer and business spending.
So far this earnings season, investors have chosen to look at quarterly results with rose-colored glasses, according to Paul Nolte, director of investments at Hinsdale Associates.
"Even earnings misses from Amazon (AMZN), Microsoft (MSFT) and American Express (AXP) dampened investor's enthusiasm only briefly," he wrote in a note. "However, the markets may be setting up for a fall decline, as expectations are getting well ahead of economic reality."
Last Friday, the University of Michigan and Reuters also said consumer sentiment fell in July. Their survey sentiment rose to a revised 66.0 from a reading of 64.6 in early July, but this was down from June's reading of 70.8.
Similarly, Gallup's latest weekly poll showed confidence confirmed a July drop following a decline in June.
And while confidence remains "significantly higher" than a year ago, Gallup says the survey suggests "no sign yet of a similar uptick in job creation or consumer spending."
Chicken or the egg
Surprisingly, one area of confidence for consumers is the stock market, with 48% of Americans polled by Gallup in June expecting stocks to rise over the next six months. But the same poll revealed 57% of Americans think unemployment will also rise over the same period, sapping willingness to spend.
Historically, consumer spending has made up about two-thirds of U.S. gross domestic production.