With the release of todayÃ¢â‚¬â„¢s consumer confidence report, there appears to be a growing Ã¢â‚¬Å“outlook gapÃ¢â‚¬Â between institutional investors, and the average consumer. According to the Conference Board, a private research group that tracks consumer confidence, the US consumer confidence index fell to 50.4 in July, from a revised 54.3 index rating in June. This pessimistic outlook flies in the face of the actions of some of the countryÃ¢â‚¬â„¢s largest professional money managers who have been returning to equity stocks at a pace not seen in a year and a half.
This is apparent when you examine a breakdown of the positions held under management. Latest figures indicate that equities now account for more than 68 percent of the holdings of institutional investors, compared to just 63 percent in April.
This move to equities by money managers seems to be at complete odds with the sentiment of consumers who if anything, are feeling more pessimistic with each passing day. The reason for the discrepancy becomes clearer once you understand that consumer fears can be traced to one nagging concern Ã¢â‚¬â€œ the slow pace of employment gains.
The employment level has stabilized somewhat from the beginning of the year when it officially topped 10 percent, but it is still in the range of 9.5 percent. The reality however, is that the actual unemployment rate is considerably higher. The number of workers who have exhausted their extended benefits continues to climb, and these individuals are no longer included in the unemployment count. The lack of clarity over whether the government will expand the extension of unemployment benefits also adds to the concern as more families are forced to get by solely on their savings.
For those fortunate enough to have maintained their employment through the recession and recovery, there is no guarantee that further layoffs will be avoided. Thus, even with full employment, consumers are watching their spending and trying to build reserves should they find themselves out of work in the near future.
Contrast this with recent actions on Wall Street where the bulls are said to be displacing the bears in ever-growing numbers. All this makes for interesting reading of course, and while the return of the bulls is a positive and welcome sign, it may be a bit premature to declare the crisis truly over. For instance, according to the Bank of America Corp., hedge funds Ã¢â‚¬â€œ which historically are more aggressive with respect to holding short equity positions than other investor groups Ã¢â‚¬â€œ have actually increased their bets on certain equities losing share price. Bank of America claims that hedge funds currently have, on average, only 27 percent more long positions, than short. Traditionally, the range is 35 to 40 percent more in favor of stock prices appreciating.
With so many conflicting signals, where should we turn for guidance? Bill Miller, Chairman and Chief Investment Officer with Legg Mason Capital Management provides his take on the situation. While not a ringing endorsement perhaps, Miller believes that stocks will be Ã¢â‚¬Å“a grinding processÃ¢â‚¬Â that overall, Ã¢â‚¬Å“will continue to advanceÃ¢â‚¬Â.
In addition, I would offer that the rate by which the economy advances, is tied directly to the rate at which jobs are added to the US economy. Until there is an appreciable gain in employment, consumer confidence will continue to lag, as will the overall pace of recovery. This fact is not lost on Federal Reserve Chairman Ben Bernanke who continues to warn that job growth will remain weak well into next year. The idea that the US is experiencing a Ã¢â‚¬Å“jobless recoveryÃ¢â‚¬Â is an oft-repeated theme and is likely to dominate Fed policy for some time yet.
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