Consumer Confidence Tumbles, Taking Stocks Down With It

Last Updated Feb 23, 2010 6:18 PM EST

Consumer confidence took a large and unexpected drop in the last month. It's no surprise that the stock market did the same on Tuesday after the survey results detailing the worsening mood were released.

The Conference Board, a private research organization, reported a confidence reading of 46.0 for February, well below Wall Street forecasts in the mid-50s and the 56.5 figure reported for January. Stocks dropped about one percent immediately after the announcement and closed near the day's lows.

The report was bad news, but drill down and it looks even worse.

The component of the headline figure that gauges the public's assessment of present conditions fell from 25.2 to 19.4, its lowest level in more than a quarter-century. More worrisome, the component that tracks expectations of conditions in six months tumbled from 77.3 to 63.8.

When using consumer confidence to predict the stock market, present conditions are almost beside the point. In fact, when present conditions are considered bleak but the future is starting to look brighter, it can herald a rally as investors start to anticipate improvement in the economy.

When the view of tomorrow deteriorates, however, especially at a faster pace than the assessment of the present, stocks often decline as investors start to price in the impact that a worsening economy will have on profits.

Another piece of data released on Tuesday showed the housing market to be mired in a state that analysts might politely call stability at lower levels. It confirmed the message being sent by the confidence survey respondents: There are few concrete signs of the recovery that Wall Street has bet on for nearly a year.