What You Should Know about Consumer Confidence for Trading - dummies

What You Should Know about Consumer Confidence for Trading

By Michael Griffis, Lita Epstein

Keeping an eye on consumer confidence is another way traders can cast a glance into the future of the market. When confidence is high, consumers are more likely to spend. The best overall index for monitoring consumer confidence is the Consumer Confidence Index (CCI), which is put out by The Conference Board.

This index is compiled through a sampling of 5,000 households and is widely respected as the most accurate indicator of consumer confidence.

Although minor changes in the CCI are not strongly indicative of a problem, major shifts can be a sign of rocky waters ahead. Most people who watch the CCI look for three- to six-month trends. The Fed, as an example, looks closely at consumer confidence when determining interest rate policy, which as you know can greatly affect stock prices.

When confidence is trending lower, the Fed is more likely to lower interest rates. Stock markets love to hear about the Fed lowering interest rates. Confidence levels that are trending higher can be a warning of a pending inflationary period. A rapidly rising trend in consumer confidence can lead the Fed to raise interest rates to cut off inflation; moreover, a rise in interest rates can send stock prices lower.

The Conference Board releases the CCI at 10 a.m. the last Tuesday of each month. The biggest weakness of this index is that it isn’t based on actual spending data. Instead, it’s a survey of planned spending. You can track the CCI online.