When major, liquid, deeply-researched equity indices start going up or down by 2 per cent or more on a daily basis, it’s time to don our favourite piece of headgear. 
What a puzzle. US investors celebrated a marginally higher-than-expected GDP figure on Thursday, only to wipe out all those gains on Friday on the back of lower-than-expected consumer spending and personal savings numbers.
What’s more, the S&P 500 has now broken down through its 50 day moving average. (Click to enlarge.)
Why the re-think? Charles Dumas at Lombard Street Research has a good, straightforward answer:
Today’s personal income data for September are more useful than yesterday’s GDP for indicating what will happen to Q4 GDP.
Some people on Wall St seem to have woken up to the fact that the combination of low consumption, poor consumer confidence and an unsustainable savings rate means the consumer can no longer do his or her bit for headline US growth.
Programmes like cash for clunkers pushed the savings rate down to 3.4 per cent in Q3, whereas it really needs to be at 7 per cent or so for individuals to repair their personal balance sheets. As Dumas says:
Put another way, Q3 “stole” from future quarters, just as cash-for-clunkers steals replacement demand from the future.
The same might be said of stock prices – pricing in a corporate earnings recovery way too early.
We say “some people” because this debate is nowhere near being decided. In fact, the debate itself is breaking down. Spend a few minutes watching this. It’s hilarious. And terrifying. (HT Zerohedge)
Related links:
US consumers increasingly worried about their finances – FT Alphaville
US consumer spending falls sharply in September – FT Alphaville