Should Lower Consumer Confidence Act be a Red Flag for Stock Market Bulls?

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The end of 2016 and the start of 2017 have been quite positive for the equity markets. The driving forces include promises of a more pro-business and tax-friendly regime, but one issue that had acted as a key boost also was rising consumer confidence. Should a larger than expected drop mean that investors, consumers and economists should start to worry?

The Conference Board released its U.S. Consumer Confidence Index for April, showing a drop to 120.3. What matters here is not just the drop, but that March’s big initial number of 125.6 was revised lower to 124.9. This is still an incredibly strong reading, but some of the market’s skeptics may take it as a peaking sign — perhaps that extreme confidence got ahead of the policies that are actually going to be delivered.

Drops were seen in both projections that make up the index. The Present Situation Index fell to 140.6 from 143.9, while the Expectations Index fell even more to 106.7 from 112.3 last month. Those saying business conditions are “good” declined to 30.2% from 32.4%, and those saying business conditions are “bad” increased to 13.8% from 13.1%.

Those showing that jobs are hard to get was low at 19.1%. Those stating jobs are “plentiful” fell to 30.8% from 31.8%. The percentage of consumers expecting business conditions to improve over the next six months fell to 24.8% from 26.9%, and those expecting business conditions to worsen rose to 10.9% from 8.5%.

Inflation expectations are unchanged at 4.7%, and those who see their incomes rising was down 3.2 points to 19.3%.

Lynn Franco, Director of Economic Indicators at The Conference Board, said of the drop in confidence:

Consumer confidence declined in April after increasing sharply over the past two months, but still remains at strong levels. Consumers assessed current business conditions and, to a lesser extent, the labor market less favorably than in March. Looking ahead, consumers were somewhat less optimistic about the short-term outlook for business conditions, employment and income prospects. Despite April’s decline, consumers remain confident that the economy will continue to expand in the months ahead.

It would be easy to say that the recent drop in confidence is a red flag for the stock market bulls. After all, many investors and market pundits have so far refused to endorse the market and economic recovery for months now (some even for years). That being said, these numbers were so high that perhaps the best case scenario would have been for them to gradually peak rather than see a sharp drop off of a lower revision.