Tuesday, July 29, 2014
The Conference Board's July survey of consumer confidence came in much stronger than expected (90.9 vs. 85.4), and marked a new post-recession high, as seen in the graph above. I note that the July value of this index is now equal to its average since 1970. The current business cycle set the all-time low-water mark for confidence in February, 2009; from the depths of depression and fear we have now recovered to something akin to "normal." It's taken over five years to get back to normal, but at least things continue to improve.
From this it follows that we are no longer in a risk-averse recovery. As confidence returns, risk aversion is declining. We see evidence of this in gold trading at $1300, down significantly from its all-time high of $1900 three years ago. We also see it in real yields on TIPS now at -0.36%, up significantly from their all-time low of -1.77% 16 months ago. And in the S&P 500's PE ratio, which has risen to 18.1, somewhat above its long-term average of 16.6, and up significantly from its low of 12.2 in September, 2011.
Is the equity market in a bubble? Doesn't look like it to me. We'd need to see a lot more confidence, much higher PE ratios, and much higher interest rates.
Posted by Scott Grannis at 9:08 AM