How Consumer Confidence Impacts the Markets

Consumer confidence is measured by the Consumer Confidence Index and acts as a benchmark in determining economic health. When the index is low, the markets react, but how? Read on to understand what the index is based on, what impacts the numbers and how the market is affected.

What Is the Consumer Confidence Index?

The Consumer Confidence Index (CCI) is a benchmark to determine the degree of optimism consumer’s express about the economy based on their spending and savings. It is a key element in determining economic health, considering it makes up 70% of economic activity.

The Conference Board, an independent economic research organization, started the CCI in 1967. It is based on 5000 households and surveys their sentiment about current and future economic conditions on a monthly basis. The more confident consumers are about the economy, the more likely they are to spend money.

A healthy CCI reading would be at 90. In strong economic conditions, the CCI would be at 100. According to a study done by Thomson Reuters, economists expected the current CCI to be at 55. However, the actual February 2010 data read at 46, falling 10 points from January’s reading of 56.5.

According to the study, economists don’t expect levels to pick up for two years.

What Impacts the Consumer Confidence Index?

As you can imagine, the gloomy economic outlook has significantly affected the Consumer Confidence Index. In fact, readings have not reached these low levels since April of 2009 when the CCI was at 40.8.

Many economists point to low job prospects and concerns about income as a basis for the low CCI readings. According to the Bureau of Labor Statistics, unemployment for most major working groups stood at 9.7% in January 2010 compared to the 7.6% reported in January 2009.

Also, the weather may have impacted consumer’s sentiment. Due to the snow, many stores have closed down which could lower the public’s confidence about the economy.

Another factor could be the concerns growing in Europe over Greece’s debt.   The markets have experienced a downturn since Greece’s challenges were made public earlier this year.

How Consumer Confidence Impacted the Markets?

After the CCI report was issued, many investors transferred their cash into the Treasury markets and interest rates, the cost of borrowing, took a tumble.

The word “yield” in terms of Treasuries, like bonds or notes, refers to the return the investor receives on a financial instrument. It is the difference between the interest rate and the time it takes for the contract to mature.

Yields on 2-year, 10-year and 30-year Treasury contracts decreased due to the Consumer Confidence Index reports. For example, the yield on the 2-year Treasury notes fell from 0.89% to 0.84%. The yield on 10-year Treasury notes fell from 3.80% to 3.69% and the yield on the 30-year Treasury bonds fell from 4.73% to 4.63%.

What Consumers Can Do to Help the Economy Recover

The Consumer Confidence Index measures the consumer’s sentiment about the state of the economy. As the most recent report shows, the general public is still pessimistic due to unemployment, income worries and Europe’s debt. To gauge where people think the economy is going, continue to follow the Consumer Confidence Index.

In past recessions, unemployment didn’t pick up until after consumer spending and confidence improved. Knowing this, it seems that we know what we need to do to help our economy get back on its feet.

*Disclaimer: Past performance is not necessarily indicative of future results.

Larry Levin trades the S&P 500 at the Chicago Board of Trade, now known as The CME Group; the world’s largest and most diverse financial exchange. Levin is the Founder of Trading Advantage.com, a leading trading education firm specializing in empowering traders to achieve and surpass their financial goals. He appears regularly on CNBC, Fox Business News and other major media outlets worldwide.

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