The headlines were full of bad news today, yet stocks rallied strongly anyway. North Korea tested a nuclear bomb, GM moved a little closer to bankruptcy, and housing prices continued to plummet. However, investors decided to pay more attention to the consumer confidence number.
According to the Conference Board, the Consumer Confidence Index jumped from 40.8 in April to 54.9 in May. This index, which is based on a survey of 5,000 households, had a cutoff date of May 19.
Given the recent and very strong rally in stocks, it is no surprise that confidence climbed. After all, the S&P 500 was 34% higher on May 19 than it was at its March 9 low. A rally of this magnitude would make even the most pessimistic consumer a little more confident.
One notable change was the big increase in the percentage of respondents who are expecting an improvement in the labor market in the near future. This is somewhat surprising since unemployment commonly continues to rise for several months after recessions end. Furthermore, most economists are forecasting very anemic growth in the U.S. for several years to come. Demand for goods and services could remain weak for a long time as consumers and businesses focus on shoring up their balance sheets.
GDP growth of just 1-2% will not do much to help the labor market. As a result, the unemployment rate could remain above 8% for quite some time. That's not the kind of outcome that will help boost consumer confidence.