Has Washington Kicked Consumer Confidence into the Sewer?

By John Whitefoot

The numbers are in, and we are not optimistic. The preliminary results of the University of Michigan’s October consumer confidence survey were released Friday, falling to 75.2, the weakest reading since April. October’s preliminary forecast was for a more modest decline to 77.2 over September’s 77.5 reading.

The ongoing erosion has been exacerbated by the U.S. government shutdown. Polls from both Gallup and the Rasmussen Consumer Index show consumer confidence has tanked since the beginning of October.

According to Gallup’s U.S. Economic Confidence Index, consumer sentiment fell 12 points for the week ended October 6 to -34. That represents the largest weekly drop since September 2008, when the index fell 15 points after Lehman Brothers collapsed. (Source: “Weekly Drop in U.S. Economic Confidence Largest Since ’08,” Gallup web site, October 8, 2013.)

By October 11, the end of the second full week of the U.S. government shutdown, the Rasmussen Consumer Index’s daily measure had slipped to 89.7, the lowest reading of the year. Consumer confidence is down 12 points since the U.S. government shutdown began and is down 13 points month-over-month. (Source: “Rasmussen Consumer Index,” Rasmussen Reports web site, October 11, 2013.)

American consumers may be resilient, but even these low readings, assuming they don’t get any worse, will still take a number of months to rebound. That could make Halloween, one of the biggest holidays next to Christmas, scary for U.S. retailers—and those ripples could extend into the December holiday season.

Even without the U.S. government shutdown, U.S. consumer confidence levels have been, for the most part, weak all year. But that can’t possibly be a surprise to Wall Street; thanks to weakening consumer confidence, S&P 500 companies have been warning investors all year long that they can’t meet projections.

During the first quarter of 2013, 78% of S&P 500 companies issued negative earnings-per-share (EPS) guidance; during the second quarter, 81% issued negative guidance. And it’s getting worse, or rather, is at its worst: of the 109 companies that have reported guidance for the third quarter, 90 have revised guidance downward. At 83%, that’s a record number of S&P 500 companies issuing negative guidance. (Source: “Earnings Insight,” FactSet web site, October 4, 2013.)

Where could investors looking to rebalance their retirement portfolio turn in this inclement environment? Consumer confidence may be low, but not so low that people won’t still brush their teeth and wash their hair. Consumer Staples Select Sector SPDR XLP is a good defensive exchange-traded fund (ETF) that contains The Procter & Gamble Company (NYSE/PG), The Coca-Cola Company KO, and Philip Morris International, Inc. PM.

Investors with low consumer confidence might want to consider shorting some of the individual stocks that make up the Consumer Staples Select Sector SPDR, or even research any of the inverse and leveraged consumer ETFs.

Cost-cutting measures and share repurchase programs can only go so far when it comes to fluffing up earnings season. Eventually, Wall Street is going to have to stand on its own economic merit.

This article Has Washington Kicked Consumer Confidence into the Sewer? was originally published at Daily Gains Letter