The first few weeks of the fourth quarter were a remarkable period for the U.S. stock market. After suffering a near meltdown at the beginning of October, the market roared back in response to surprise cuts in two key interest rates controlled by the Federal Reserve. Apparently, Fed chairman Alan Greenspan became somewhat alarmed by the rapid deceleration of the U.S. economy, enough to overcome his well-known aversion to risking inflationary pressures by lowering interest rates.
By the end of October, the Conference Board reported in its mid-month surveys that a rising number of respondents are concerned about their economic prospects. Since August, consumer confidence in economic conditions six months from now has fallen sharply (see chart), from 116 to 87.
The nose-dive in October (and the downward revisions of September's readings) were not a big surprise to those who monitor the stock market carefully for its reactions to breaking news. That's why we designed our SentiMeter stock index of companies whose businesses are sensitive to consumer confidence swings. It's a real-time indicator, without delays associated with canvassing, compiling, and distributing survey-based data.
October is also the month most companies report how their businesses fared in the late summer. For the first time in seven years, aggregate net income for the 500 companies which comprise the Standard & Poor's Composite index showed a year-on-year decline. Many companies delivered disappointing results and started planning corporate restructurings, including staff cuts. It's easy to see how a tough business environment causes consumer confidence to drop.
Silicon Valley is already showing some of the signs of slumping share prices. Retail newspaper advertising is slowing, according to Knight Ridder, which publishes the San Jose Mercury News. Help-wanted ads-which account for up to two-thirds of classified ad business-are weak, particularly for technology-oriented jobs.
For a number of U.S. companies, problems have been imported from Asia. Bowling equipment-maker Brunswick and laundry-giant Maytag-among other companies in our index-experienced sharply lower sales in Asia in the latest period. Business challenges such as these emerge as confidence killers in a globally connected economy.
According to a survey by the National Business Travel Association, corporate travel plan is being scrutinized for opportunities to trim costs; on average, budgets could be cut by 20 percent. Shifts in corporate travel budgets have proven to be a leading indicator of leisure travel trends. Also, a case of consumer confidence's role in capital expenditure decisions: Host Marriott, owner of 104 Ritz-Carltons and Marriotts, shelved plans for four new full-service hotels.
Stay tuned. It's likely that the stock market-and our SentiMeter-will signal an improvement in consumer confidence before it becomes apparent in traditional survey data. N