Investors should not assume that U.S. equity markets are falling only in sympathy
with Europe's financial problems because the spreading sovereign credit problems
in Europe are similar to those faced by municipalities, states and the U.S.
Government. Regardless of why stock prices are falling, stock market performance
and consumer and business psychology are inextricably linked (Figure 1). As
stocks fall, so does consumer confidence. Because of the already fragile consumer
and weak economy, falling share prices are likely to be even more influential
on consumer confidence and economic activity. It should therefore come as no
surprise to see tangible economic data in the coming days and months that justifies
the recent decline in global stock markets. This data would confirm that the
bear market rally that started last March is over.
Figure 1. S&P 500 vs. Michigan Consumer Sentiment Sources: St. Louis Federal Reserve, Continental Capital
Advisors, LLC
Edward Dewey, in his 1947 book Cycles, The Science Of Prediction, explains
the correlation between stocks and psychology:
Iron is a tangible commodity, a thing, a visible reality that would exist
in some form or other if no man had ever been on earth, or if all men disappeared.
But stocks and prices have a different sort of reality. A stock certificate
is a slip of paper which depends for its being on states of mind; whatever
the assets behind it, only the mind can provide a link between them and the
paper. Further, prices also have a basic reality that is purely mental, for
- regardless of what the figures be that prices are quoted in - the figures
can only be an index to a mental attitude focused as desire. Stock prices
reflect, far more than some commentators ever pause to realize, the psychological
states prevailing in a community.
The Dow/Gold ratio is a useful tool for measuring stock market psychology.
As shown in Figure 2 below, this ratio tracked consumer confidence for the
majority of the last five years before diverging at the start of the bear market
rally in 2009. Given that the Dow/Gold ratio did not rise with consumer sentiment
in 2009, it is likely that the sharp rise seen in stocks and consumer confidence
was only a temporary rebound. For more on the Dow/Gold ratio, please refer
to our commentary from January 8, 2010 at http://safehaven.com/showarticle.cfm?id-15434.
Figure 2. Michigan Consumer Sentiment vs. Dow/Gold Ratio Sources: St. Louis Federal Reserve, Continental Capital
Advisors, LLC
Continental Capital Advisors, LLC was formed to offset the destruction of
wealth caused by the global devaluation of currencies by central banks. The
name Continental Capital symbolizes the 1775 US Currency, "the Continental",
which was backed by nothing and quickly became devalued.
Disclaimer: The above is a matter of opinion and is not intended as
investment advice. Comments within the text should not be construed as specific
recommendations to buy or sell securities. Individuals should consult with
their broker and personal financial advisors before engaging in any trading
activities. Certain statements included herein may constitute "forward-looking
statements" with the meaning of certain securities legislative measures. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements
of the above mentioned companies, and / or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Any action taken as a result of
reading this is solely the responsibility of the reader.
Continental Capital Advisors, LLC was formed to offset the destruction of
wealth caused by the global devaluation of currencies by central banks. The
name Continental Capital symbolizes the 1775 US Currency, "the Continental",
which was backed by nothing and quickly became devalued.
Disclaimer: The above is a matter of opinion and is not intended as
investment advice. Comments within the text should not be construed as specific
recommendations to buy or sell securities. Individuals should consult with
their broker and personal financial advisors before engaging in any trading
activities. Certain statements included herein may constitute "forward-looking
statements" with the meaning of certain securities legislative measures. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements
of the above mentioned companies, and / or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Any action taken as a result of
reading this is solely the responsibility of the reader.
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