Stocks continue to drag even though the U.S. Consumer is more Confident

Growing consumer confidence in the United States was not enough to offset fears that the stock market is overvalued.  Consumer confidence rose to 101.5, a tremendous rise from the prior reading of 90.9, according to The Conference Board.

Growing consumer confidence in the United States was not enough to offset fears that the stock market is overvalued.  Consumer confidence rose to 101.5, a tremendous rise from the prior reading of 90.9, according to The Conference Board.

The Consumer Conference Index rose sharply above consensus expectations of 94, with a 6.5 percentage point rise in job optimism, suggesting that employment conditions are improving considerably in the U.S. The Conference Board data for those describing jobs as “currently hard to get” fell to 21.9%, indicating more Americans are finding it easier to get work and shift jobs.

New home sales also saw a sharp increase.  According to the Department of Housing and Urban Development, seasonally adjusted annualized home sales rose 5.4% above June’s reading to 507,000 in July, a 25.8% year-over-year growth rate. The increase also indicated that supply of new homes is down markedly, with the total months of supply falling to 5.3 months, a historically low-level in-line with pre-2001 averages. However, that remains above the 4-month rate saw in the late 1990s and early 2000s.

Home sales, although strong, came slightly below expectations of 516,000 home sales, while the prior reading revised slightly downward.

The median price for new homes rose 3% to $285,900, a 2% increase from the same period a year ago. Some analysts believe home sales and prices will continue to rise, as inventory continues to remain weak and interest rates remain low.  Further, improvements in the labor market will give more buyers the confidence to enter the market.

Equity Reversal

News of strong home sales and greater consumer confidence initially moved stocks sharply higher, helping the S&P 500 to erase most of its Monday losses by 11:30 am. However, stocks reversed later in the afternoon, and in the last hour of trading, the S&P 500 lost 50 points and closed 1.35% below the prior day’s close.  As a result, the S&P 500 is down 9.3% year-to-date.

Despite its fall, the S&P 500 remains an outperformer relative to the volatile Shanghai Composite Index, which is now 9.5% below its opening value at the beginning of the year. The index has also erased 43% of its value since the middle of June, when it reached an all-time high.

Chinese stocks faced several hurdles recently, including the devaluation of the Chinese yuan, which has knocked investor confidence. Further attempts to boost the stock market, including allowing pension funds to buy stocks and a ban on short selling and selling from insiders and institutional investors, has done little to help the market. This week, rumors surfaced that the Chinese government would abandon its attempts to support the stock market.

A recent attempt to boost liquidity by loosening interest rates and reserve requirements failed to help and it fell again in Wednesday trading.