Consumers feel better, and so does the stock market

12:29 PM, May 26, 2009

Consumers are feeling somewhat better, and that's making investors feel better too.

The stock market rose for the first time in a week today as unexpectedly strong consumer-confidence data sparked optimism that spending by Americans could support a hoped-for second-half economic recovery.

The Dow Jones industrial average is up about 175 points, bolstered by stocks of consumer-discretionary companies such as restaurant, hotel and clothing chains. Earlier in the day the blue-chip gauge was up by almost 220 points.

An index of consumer sentiment spurted this month to 54.9, its highest level since September, according to the Conference Board, a New York-based research group. That was up from a revised 40.8 last month and far outdistanced the 42.6 level anticipated on average by economists.

“While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us,” said Lynn Franco, who heads the organization’s consumer research center.

The increase, the third in a row since the index hit a low in February, partly reflected an improved perception of the employment market.

The so-called expectations index, a measure of the conditions consumers foresee in the coming months, surged to 72.3 from 51.

Investors hope that resilient consumers can help pull the economy out of recession later this year and pad badly bruised earnings at major retailers.

“Higher consumer confidence plus the boost to disposable income in Q2 from a tax cut and extra Social Security payments make it more likely that a 'breakout' number on retail sales will be recorded soon after the weak readings of the last several months,” economists at UBS wrote in a note to clients.

Consumer-discretionary stocks are up more than 3.5% today, the best performance among 10 major sectors tracked by Standard & Poor’s Corp.

Hotel chains are doing especially well. Starwood Hotels & Resorts Worldwide has climbed 8.8% today, Wyndham Worldwide is up 8.4% and Wynn Resorts is up 6.7%. In other sectors, Home Depot is 4.4% higher and JPMorgan Chase is up 5.6%.

But there is only so much that consumer confidence alone can help stocks. One reason consumers are feeling better is that their portfolios have rebounded sharply since stock indexes hit multiyear lows in early March. So today’s rally is relying on something akin to a perpetual energy machine.

Moreover, there are big questions as to whether consumers can come to the market’s rescue.

The most obvious is the continued free fall in housing prices, which was reinforced with new data released Monday.

The widely followed S&P/Case-Shiller index of home prices in 20 cities slumped 18.7% from March 2008 through March 2009. (Los Angeles was off 22.3%.)

More than that, the job market remains weak and consumers have boosted their saving and begun whittling their debt.

“The type of environment we’re in, and coming out of, is unlike anything we’ve seen in our lifetimes,” said Dan Greenhaus, market analyst at Miller Tabak & Co. in New York. “How consumers perform in a massive deleveraging phase remains to be seen.”

-- Walter Hamilton
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