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Confidence: Most Valuable Currency of Markets

I traded currencies for ten years at the interbank level. I handled over $100 million in trades every day. You know what the most valuable currency in the world is?

It’s confidence. Consumer, business, and investor confidence make things happen in any economy. It’s where an outlook becomes a decision to buy, invest, make, or hire.

On the last Tuesday of every month, we get two crucial readings on this front, Consumer Confidence from the Conference Board and the State Street Investor Confidence Index.

In the video that accompanies this article, I show multi-year charts from of each survey. Both are indicating these two important decision makers, consumers and institutional investors, are still optimistic overall despite weak GDP growth and an Earnings Recession.

This is in contrast to another cohort of the economy, the corporate purchasing managers whose ISM Manufacturing survey spent 5 months below the all-important 50 level, signaling economic contraction.

What About Small Business?

But the most interesting “confidence survey” to me right now is the National Federation of Independent Business (NFIB) Small Business Optimism Index.

According to Bloomberg on April 12 when the NFIB published their latest data…

“Small business owners remain pessimistic, with the small business optimism index dipping another 0.3 points in March to 92.6, surpassing February's two year low and remaining well below the 42-year average of 98.”

You can see the chart, and a full description of the 10 areas of economic optimism that small business owners are asked about, in the video that accompanies this article.

I also show a chart from Doug Short at Advisor Perspectives that plots the NFIB survey against Consumer Confidence to show their correlation since 1985. What is of concern to me is the slow but steady erosion in optimism among small business owners in the past year.

While economists and investors debate over this or that recession indicator or data point about debt, growth, and monetary policy, I think paying attention to consumer and small business confidence could be the easiest and most fruitful task of all. 

Because while institutional investors’ confidence, as described in the State Street survey, might remain strong because of central bank liquidity and support for financial markets, consumers and small businesses don’t care much about what the Fed is doing or not doing.

But I think the Fed is definitely watching them when contemplating another rate hike.

Kevin Cook is a Senior Stocks Strategist at Zacks Investment Research where he runs the Follow The Money Portfolio.

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