Confidence, lost

Stocks tumbled yesterday after opening with solid gains resulting from jitters that just won’t go away. Consumer confidence is dwindling, which could be a good thing…if it doesn’t dwindle too much.

On the shoulders of consumers. Citizens to Fed, “We got your message loud and clear.” The end of the month and the quarter is nigh, and that means lots of portfolio managers are rebalancing. Rebalancing is when portfolio managers adjust their allocations across their various holdings. It can be as simple as reducing a position in stock that has outperformed and putting the sale proceeds into a position which has underperformed. The end result would align percentage allocations with investment policies. Another facet of rebalancing involves trimming positions that a manager no longer wishes to hold. In this case the manager can distribute the proceeds across the remaining positions, buy new positions, or simply keep the proceeds in cash, AKA dry powder. There is nothing magical about it, but it does tend to inject significant volatility into the market, as the vast majority of stocks and bonds are held by institutional money managers. Did I just say, “significant volatility?” Indeed, I did. Yes, more volatility on top of an already volatile market. That volatility can certainly account for some of the selling that occurred in yesterday’s session which ended up being the biggest loser in 2 weeks. And to think, just the other day we had a near-term record rally.

A more likely cause of yesterday’s selloff was the weaker than expected Conference Board Consumer Confidence indicator which dipped to 98.7 in June while the prior month’s number was revised down to 103.2 from 106.4. The decline reflects an ebb in both confidence in the Present Situation and in Expectations (future). There is no mincing words on what that all means. Consumers are losing confidence. This is also consistent with the timelier University of Michigan Sentiment indicator which just last Friday came in lower than economists’ were expecting. Indeed, it came in lower than any other index reading since the index began in January of 1977. So, the numbers support what you probably already know, all these jumps in prices, rising interest rates, and the threat of a recession are starting to worry consumers, average folks like you and me.

We average folks are important to the economy as our spending makes up more than 2/3 of US GDP. If we are less confident, we are likely to consume less, which will ultimately slow GDP growth. Yes, that is bad news which could lead to recession. However, there is some good news hidden in the folds of reduced consumption. In a run-away inflationary environment such as the one we are in now, one of the simplest ways to tamp down prices is to simply reduce demand. With warehouses and shelves filling up with unbought inventory, retailers are forced to lower prices in order to keep inventory velocity steady…and maintain revenue growth. In basic economics, lower demand leads to lower prices. Lower prices can also be achieved by increasing supply. Supply of goods has been a problem in the wake of the pandemic and sharp recovery. However, a growing number of experts believe that many of the issues that caused the tightening in supply have subsided and merchandise is beginning to hit warehouses at a more normal pace…just in time for a slowdown in demand. Ultimately the combination of these forces will bring prices down. What this all boils down to is that the fall off in consumer confidence is one of the steps necessary to fight price inflation. That is precisely what the Fed wishes to engineer with its rate hikes and tough talk. The hope is that prices will moderate before all the reduced demand pushes the economy into a recession. Whether or not that happens is still quite unclear, which explains the market’s recent volatility.

YESTERDAY’S MARKETS

Stocks could not hold on to early-session gains which quickly faded into a selloff by the close. The S&P500 fell by -2.01%, the Dow Jones Industrial Average traded lower by -1.56%, the Nasdaq Composite Index dropped by -2.98%, and the Russell 2000 Index traded lower by -1.86%. Bonds gained and 10-year Treasury Note Yields dipped by -2 basis points to 3.17%. Cryptos gave up -3.40% and Bitcoin declined by -3.11%.

NXT UP

• Annualized Quarterly GDP (Q1) is expected to come in at -1.5, in line with the prior two estimates.
• ECB Chair Christine Lagarde and Fed Chair Powell will both speak at the ECB forum. Fed members Mester and Bullard will also speak today.