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Consumer Confidence Jumped in December, But Why?

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
January 7, 2014

IN THIS ISSUE:

1. Consumer Confidence Jumps in December

2. Home Prices Soar 13.6% in October, But…

3. A Sampling of Predictions for the New Year

4. The Prevailing Forecast – Don’t Worry, Be Happy

5. Obama’s Aggressive Liberal Agenda For 2014

Overview

Today we’ll look at several economic reports, including a big jump in consumer confidence last month. That seems a little odd given that over 63% of Americans still believe the country is headed in the wrong direction as I reported last week.

From there, we will consider some economic and market predictions for the New Year. Many forecasters believe the stock market will experience a downward correction sometime this year, which happens often in mid-term election years. We’ll look at a chart showing all of the mid-term year corrections going back to 1930. You may be surprised.

Finally, despite President Obama’s plunging approval ratings, he still plans to proceed with an aggressive liberal agenda in 2014. Bill Clinton wisely moved to the center when his liberal agenda became unpopular. Not this president!

Consumer Confidence Jumps in December

US consumer confidence bounced back in December after declining in November and October. The Consumer Confidence Index jumped to 78.1 from a revised 72% in November. It’s the highest reading since September. “Despite the many challenges throughout 2013, consumers are in better spirits today than when the year began,” said Lynn Franco at the Conference Board that tracks the numbers.

Conference Board

Consumer confidence is nearly back to where it was before the partial government shutdown in October. Recent job gains above 200,000 a month and a surging stock market have made some Americans more optimistic about the economy and hiring both now and in the near future.

The confidence index has averaged 73.3 this year, the highest since 2007. In 2009, when the economy was in recession for half the year, it averaged 45.2. But confidence remains below the five-year high of 82.1 reached in June of this year. And that’s still below the reading of 90 that is consistent with a healthy economy.

The report suggests Americans are willing to spend more on large purchases. The percentage of Americans planning to buy a home in the next six months rose to the highest level since July. And the proportion of Americans planning to purchase a major appliance in the next six months rose in December from the previous month.

There were some weak spots in the report. For example, income rose at a slower pace than spending last month. That means Americans saved less to spend more. Still, the December gain in the confidence index was consistent with the University of Michigan’s Consumer Sentiment Index which rose to 82.5 last month from 75.1 in November.

Finally, there’s just one thing I can’t understand about this latest boost in reported consumer confidence. Last week I wrote about the latest findings in polls that ask about the direction the country is headed: Right Direction, Wrong Track. Those numbers remain almost identical this week with only 30% who think the country is headed in the right direction, versus a whopping 63% who believe we’re headed in the wrong direction.

Given that the Right Direction, Wrong Track numbers have not changed, why has the Consumer Confidence Index moved sharply higher all of a sudden? It’s like the 3Q GDP advance estimate of 4.1% on December 20 that was so much better that forecasters expected. It will be very interesting to see if that number holds up when it is revised on January 30. Ditto for the next revision of consumer confidence. We’ll see.

Home Prices Jump 13.6% in October, But…

The housing market has been one of the strongest sectors of the economy over the last couple of years. The closely-followed S&P/Case-Shiller home price index for October was up 13.6% compared to a year ago. That’s the largest 12-month gain since early 2006, which was at the height of the housing bubble. Prices have been improving at a faster annual rate every month for nearly two years.

Data for November suggest, however, that the upward trend in prices is slowing down. The national median existing home price for all housing types was $196,300 in November, up 9.4% from November 2012. The pace of existing home sales has declined for the last three months. Existing home sales fell 4.3% to 4.90 million in November, down from 5.12 million in October.

The 4.90 million pace of sales in November was actually lower than the 4.96 million pace in November 2012. This is the first time in 29 months that sales were below year-ago levels. Higher prices and the recent jump in mortgage rates are considered the culprits. The average rate for a 30-year fixed-rate mortgage rose to 4.53% in the week ended January 2, reaching the highest rate since September. It was 4.48% in the prior week.

Sales of new homes continue to be robust despite edging 2.1% below the October pace to 464,000 units in November. October’s peak of 474,000 units sold was the highest since July 2008. Housing starts remain on a tear. November housing starts rose 22.7% from October to an annual rate of 1,091,000 units, according to the Commerce Department.

A Sampling of Predictions for the New Year

I’m not big on making New Year’s predictions but I do like to know what others are predicting. Below are some New Year’s predictions from Howard Gold, a popular writer for MarketWatch. I’m not suggesting that these predictions will be accurate, or if I even agree with them. I merely think that Mr. Gold’s predictions and forecasts are consistent with what a lot of investors and financial advisors are thinking. I’ll insert some comments of my own as we go along.

QUOTE:

The coming year may see some important changes in the markets, as the bull market ages and the Federal Reserve, under a new chair, unwinds (or “tapers”) its unconventional monetary policy, known as quantitative easing. Here are my predictions.

1. The U.S. economy will have its best year since 2006. That was when real GDP growth came in at 2.7%, according to the World Bank. Economists polled by Reuters expect GDP to grow by 2.6% early in the year and 3% by the end of 2014.

What will drive it? The continuation of the multi-year recovery in housing and autos, where pent-up demand remains strong. Companies also may make more capital investments as business confidence rises. What won’t happen, unfortunately, is a surge of middle-class jobs rather than the part-time or low-paying service jobs the economy is creating now. Welcome to Minimum-Wage Nation.

2. Washington, D.C.’s toxic politics won’t shake markets in 2014. The budget deal between Rep. Paul Ryan and Sen. Patty Murray marks a fundamental change from the last two years of brinkmanship and dysfunction. During that time, we approached default (August 2011) and experienced a government shutdown (October 2013). Why the change? Practical politics. Republicans’ poll numbers tanked after the pointless government shutdown, but they rebounded following the disastrous rollout of Obamacare. The GOP thinks it has a winning strategy in running against Obamacare in the midterm elections. David Wasserman of the Cook Political Report expects Republicans to gain up to 10 more seats in the House of Representatives. They could take back the Senate as well.

[GDH: Come on, a ‘fundamental change’ in politics? This is an election year after all. While the two parties may play nice a bit longer early this year, by this summer (at the latest), I expect both parties to be as nasty and partisan as ever.]

3. A stronger economy and less political dysfunction lead to a faster taper. In his last news conference, outgoing Federal Reserve chairman Ben Bernanke laid out a roadmap for the Fed to phase out its third round of quantitative easing, or QE3, in 2014. I believe the stronger economy and the decline of partisan gridlock in DC will allow his successor, Janet Yellen, to end QE3 ahead of schedule.

Yellen has impeccable dovish credentials, so she has the political cover to do a monetary “Nixon goes to China”: end QE3 quickly, but maintain extra-low interest [short-term] rates longer than investors expect. I also think she will make a strong argument that “tapering isn’t tightening,” and the markets will believe her.

[GDH: Because stocks rallied strongly immediately after the announcement that the taper will begin in January, most investors and advisors now assume that the reduction and the end of QE3 will not hurt the stock markets. I disagree.]

4. Stocks will hit new highs, but will have their biggest correction in three years. Investors already have concluded that the end of QE3 doesn’t mean the end of the bull market. That means stocks will trade on improving economic and business fundamentals, driving the S&P 500 index to new records above the 2,000 milestone in 2014.

But valuations are looking stretched and institutional sentiment is frothy… That’s why I’m expecting the biggest correction since the 16% and 19.4% retrenchments in 2010 and 2011. Craig Johnson of Piper Jaffray recently wrote that since 1930, market pullbacks in the traditionally weak midterm election year have averaged 17%. And we’ve had only three corrections of less than 10% since 2011, according to InvesTech Research. So we’re due for a much bigger one that would test investors’ faith in this almost five-year-old bull market.

Corrections in Midterm Elections

[GDH: The chart above did not appear in Mr. Wood’s piece in MarketWatch last Friday. Many investors who read his comments about a 17% average pullback probably saw that and thought: ‘17%, hmmm, I could handle that.’ But as you can see in the chart above, five of those mid-term years had corrections that were over 25% and two that were nearly 35%. No one knows how big the next one will be.

What we do know is that if it’s a large correction of 25% or more, a lot of investors will bail out. And for those who stay in, remember that the larger the pullback is, the greater the return must be to recover the loss. Now may be the ideal time to consider the professional managers I recommend that seek to avoid large market corrections and bear markets. I’ll show you a great one to consider next week.]

5. U.S. stocks will outperform Europe and emerging markets again. The Wall Street strategists agree that the S&P 500 will rise by 8% (don’t they say that every year?) and that Europe is the place to be in 2014. Trust me: No one ever made money chasing Wall Street’s thundering herd. The gurus’ rationale is that while the Fed tapers, the European Central Bank is still going full throttle, proving only that Wall Street, not the economy, is the true addict to central banks’ largesse.

And yes, Europe may rebound from zero or negative growth, but the U.S. economy will do much better. And their banks are far more vulnerable than ours to the kind of crises that have shaken the euro zone in recent years. So, although Europe’s valuations are more modest than the S&P, there’s no reason to own more than a market weight in the Old Continent.

QE’s phase-out will hit emerging markets hardest. During the mini-panic of last spring and summer, when Chairman Bernanke first raised the prospect of tapering, EM currencies and debt were pummeled, and their stocks lagged the U.S. badly in 2013. Some countries like China and Brazil are in secular bear markets. They will eat America’s dust again this year.

END QUOTE

The Prevailing Forecast – Don’t Worry, Be Happy

In sum, the prevailing consensus is that: 1) the economy will be better this year; 2) stocks will be higher by the end of the year, but not up nearly as much as last year; 3) the markets will have a downward correction at some point this year, but will recover from it; and 4) the markets are no longer worried about the end of QE because Bernanke promised to keep short-term interest rates near zero for at least a couple more years.

In short, everything will be fine in 2014, save for the bond market which took it on the chin last year and may fall more this year. But when it comes to your stock portfolio, don’t worry, be happy, so we are told.

Might I remind readers that the prevailing consensus is often wrong. There’s this pesky little thing called “contrary opinion” which suggests that: When most everyone thinks alike, they are likely to be wrong at some point.

Obama’s Aggressive Liberal Agenda For 2014

President Obama’s approval ratings plunged in 2013 to near the same levels as President Bush’s in 2005, his first full year after re-election. Bush never recovered, and now many are predicting the same fate for Obama. They say that not only has his approval rating plummeted, trust in him by the American people has nosedived as well.

The president is mired in the worst extended polling dip of his five years in office, dragged down by a series of scandals (National Security Agency spying, IRS targeting, Benghazi, etc.) and the disastrous rollout of Obamacare.

Gallup’s month-by-month breakdown of Obama’s 2013 job-approval numbers shows a steady decline, from 52% in January to 41% by December. The Washington Post-ABC News poll pegged Obama’s job-approval rating at 55% in January 2013, and he ended the year with just 43% approval.

Many pundits predict that President Obama will get very little of his political agenda accomplished during the remaining three years of his presidency. Whether that’s true or not, Obama has an aggressive agenda he is going to try to advance despite his sagging approval ratings.

Here is an advance look at some of the proposals he’s likely to announce in his January 28 State of the Union address:

Income EqualitySeveral specific proposals (read: new taxes on upper income folks) to close the so-called “income gap.”

Minimum Wage – Raise the federal minimum wage to $10 an hour this year. You may recall that he called for a rise to $9 in his speech last year and now he wants $10.

Unemployment Benefits – For some 1.3 million Americans, extended unemployment benefits came to a halt at the end of December. Now the president wants those benefits extended for at least another three months.

Immigration Reform – The president wants new laws to provide “a path to citizenship” (amnesty) for over 11 million illegal aliens who would jump to the head of the line in front of those who have been waiting patiently to gain citizenship legally.

Climate Change – A raft of new environmental regulations will be coming from the EPA in June, and more from the Department of Energy and even the State Department this year. Obama is as committed as ever to getting his “green” agenda passed.  

Infrastructure Spending – The recent two-year budget deal passed by Congress did not include any additional spending for infrastructure projects. As a result, many expect the president to have new infrastructure proposals (ie – taxes) in his SOTU speech.

Despite the fact that his approval rating is in the dumps – thanks largely to the disastrous rollout of Obamacare – that apparently won’t stop Obama from pushing ahead with his liberal agenda. Bill Clinton wisely moved to the center when his liberal agenda became unpopular. Not this president!

Wishing you a happy and profitable New Year,                                                   

Gary D. Halbert

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Read Gary’s blog and join the conversation at garydhalbert.com.

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