Consumers Pull in Their Horns

02/17/2009 1:00 pm EST

Focus: MARKETS

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

Tobin Smith and Josh Levine of ChangeWave Investing say their latest survey indicates consumers are retrenching even more, and that’s bad news for stocks.

The pace of the economic downturn is accelerating. The ChangeWave Alliance is telling us that the small signs of stabilization we saw in early January proved to be extremely short-lived. Our latest monthly consumer spending survey provides a dire picture of the next 90 days.

By every measurement taken by the Alliance, the feedback is fiercely negative and indicates that the brief period of optimism spurred by the Obama inauguration is over just as quickly as it began.

Sixty-one percent of respondents said they'll spend less money during the next 90 days, the highest level ever recorded in an Alliance survey.

Consumer sentiment and expectations are now considerably more negative than they were in early January. In fact, only 8% of respondents said they believe the economy will improve—and that's a decline of four points since January, and the lowest reading since the Alliance began asking this question.

As for the reasons for spending less, the number-one reason is a drop in income. It has become the dominant reason why consumers are spending less—rising six points just since January! This astonishing jump in such a short time highlights just how serious the impact of the financial crisis is on consumers.

The downward forces we're all feeling have been at work for a long time, and negative momentum is currently strong. Many of the proffered remedies will require significant time to take hold—anywhere from one to two years, or more.

Additionally, this economic downturn is anything but typical. The foundations of the US and global financial systems are badly busted and will require rebuilding over a considerable amount of time. It's sad to say but, for now, no one appears to have a clue about what shape that rebuilding will ultimately take.

Meanwhile, the government has exhibited none of the boldness that's required to successfully deal with the immense challenges.

As for the stock market, any rallies in the weeks ahead will be treated as opportunities to sell weak positions that have no prospects for the longer term, i.e., into 2010.

We can't imagine that the stimulus plan and financial rescue will stimulate investors into pushing the Standard & Poor’s 500 index above 935. It's only a matter of time before the index revisits the November 2008 low of 730—and there is an increasing probability that it could eventually sink to the 600 range.

The outlook for S&P 500 earnings has spiraled lower, as Wall Street analysts adjust their estimates from what were outrageously high levels. We continue to expect earnings to fall to $50 (and possibly lower) before it's all over. At 12x earnings, that would put the S&P 500 at 600.

To put it another way: Folks, it's going to get much uglier before it gets better.

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