Tuesday, November 29, 2016

The 'Trump Bump' - Consumer Confidence

The US Conference Board today released November Consumer Confidence figure as 107.1, well above estimates (Bloomberg survey 101.5) and the highest level reached since July 2007.  I am hearing it called ‘The Trump Bump’.  Has the unexpected change in political developments resulted in a changed consumer attitude which will have economic impact? 

In reviewing the chart of Consumer Confidence below, we can see that since late 2014, the consumer confidence report has remained within a range of about 91-103 until today.  It had earlier risen from a financial crisis low of 25.3 in February of 2009.  The break-out new high will give rise to additional questions as to how the recent unexpected political developments are impacting consumer confidence and more important economic variables.    

The other day, I fielded a query from a long-time friend and now Risk Manager at a major European Institution.  He suggested levels to watch for over a 1-3 year horizon might be S&P 2600, US Dollar Index (DXY) 120 and UST 10 Year Yield 3% and asked if my intermediate term views were synced and what other positioning strategies might I be focused on.

Excerpts from my response are below: 


Other assets to watch might be industrial metals such as copper which though a little tricky as China has used this particular commodity heavily in collateralized borrowing, as an asset, copper could nearly double over the intermediate term. Aluminum too shows price action which is breaking above a 5-year, down-trend and looks promising for a spirited advance. I would also be constructive on energy and in particular oil. Despite potential increased production here, the potential for oil demand strikes me as significant and will limit the potential for a return to recent low prices and instead sets up for a move toward $100 or better. Further, I am intrigued by the price action in Baltic Dry Index and would recommend being watchful there for signs of increased demand for commodity movements.

We like to think of animal spirits as derived from the ‘feel good’ that everything is right, orderly and in place to deliver all that is needed. From this point of comfort, we expect all souls to have a willingness to take on at least a slightly greater risk-profile, be that in a want for a better job, the purchase of a slightly better home that was earlier consider out of reach, or the build-out of a business where once playing it safe no longer seems appropriate.

There is a modest minority who today see recent political developments in the States as a basis for increasing risk profiles. Those who do believe that this largely unexpected political outcome would act as a catalyst for positive (economic growth) change have been acting quickly and aggressively. If my early assumptions are correct, there will be additional believers who, with the backdrop of improving economic conditions as their guide, take assurances from recent changes and alter habits which have helped to limit economic growth over the last decade. Finally, there will be those who have such distaste for the recent political outcome that they will be blinded from the prospects for increased wealth. Only with time will this not small group allow repeated instances of proved economic conditions improvement to sway them into taking on greater risk.

What the above means for animal spirits is that in this instance they are expected grow out of the jolt from unexpected and for many, unpleasant political developments. We shall see the many follow the lead of the quick to respond if only modest signs of improvement are notable in the coming months. It will be many months and possibly years before the impulse from this wave of renewed animal spirits runs its completed course.


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