Friday, August 12, 2011

Watch what I do not what I say

US consumer sentiment dropped to the lowest level since May of 1980 in early August as high gas prices, lingering high unemployment, a cratering stock market and a dysfunctional government took its toll on confidence.  The index fell to 54.9 from 63.7 in July on expectations of 61.  This contrasts with another government report which said that consumers spent more in July pushing up retail spending .5% or a 6% annualized rate.  This was the best showing by consumers in four months.  So, how to reconcile these two reports?  On one hand consumers say they are worried about the economy's prospects but they haven't shut their wallets off completely yet.  I think its important to focus on what consumers are doing rather than what they are saying.  We can discount the sentiment data as long as we continue to get good retail sales numbers.  A lot of times consumers mood may be dour but they will keep spending.  Consumption makes up about 70% of the US GDP so any change in attitude and behavior by consumers is watched very closely by economists and wall street.  The danger is we enter a negative feedback loop whereby consumers believe the economy is getting worse and cut their spending which then really does make the economy worse. 

Today's market action was very positive in my opinion.  We got a lift on the better than expected consumer spending data for July but fell sharply once the consumer sentiment survey came out.  Bulls reasserted themselves however and pushed the indexes up 1-1.5%  where we bounced around in a range the rest of the day finally finishing up 1% on the DJIA.  I kept expecting to see a selloff at the end of the day because I didn't think anyone wanted to be long over the weekend  but it never materialized.  It looks like we could get a continuation of this mini rally on Monday.

I didn't do anything with my portfolio today.  I expect we trade in a range for the next few months barring some escalation of the European debt crisis or worsening of economic data.  All the data was fairly good this week with new unemployment claims and retail sales coming in better than expected.  If we can continue this positive trend in the fundamental data, the market should be able to keep rallying.  I remain constructive on the market but expect high volatility to continue so I will be kicking back and watching the action rather than participating too much.  Best of luck in your investing!

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