Economic Confidence and the Stock Market

It is odd that economic confidence should be tied to the stock market. According to Gallup, it is, even though the great majority of American do not own stocks — at least not directly.  Observations of the stock market, which can change direction due to the most modest news, are hardly a good way to measure the turns of economic tides.

A new Gallup poll shows that “Americans’ confidence in the economy faltered last week — reversing the slight improvement seen in early September — and is now nearly as negative as it was throughout August after a steep decline in July. Gallup’s Economic Confidence Index for the week ending Sept. 25 is -52, compared with -54 in late August and -34 at the start of July. Confidence continues to run well below year-ago levels.” Gallup claims that this trend is closely tied to movements in the DJIA.

While Americans appear to tether their view of the economy to the stock market, doing so is a mistake. The markets move with daily news, now as much as they have at any time in the past. Sentiment about EU debt problems can push and pull major indices up or down by as much as 2% or 3% a day, although so far most signals from Europe have been entirely inconclusive. The markets also react to much more minor data, including weekly jobless claims and building permit numbers. The information behind these reports is fickle, and usually the numbers are subject to revisions. Markets also can be violently affected by announcements from or rumors about one large company. An unconfirmed report yesterday that Apple (NASDAQ: AAPL) iPad sales in the next quarter may be poor pulled down part of the tech sector. The rumor may be proved false as quickly as it was taken as truth.

Americans may have become so skittish about the economy, the values or their homes, and their job prospects that they will react to data that are unrelated to many of those things. That deep nervousness is a sign of just how desperate people are to hear just one thing that they can take as good news. In the meantime, they react too quickly to that which is bad.

Methodology: Results are based on telephone interviews conducted as part of Gallup Daily tracking Sept. 19-25, 2011, with a random sample of 3,501 adults, aged 18 and older, living in all 50 U.S. states and the District of Columbia.

Douglas A. McIntyre