The Stock Market Might Be Anticipating An Improvement In Consumer Confidence

The market's strong advance in the third quarter of this year, up over 11%, may be occurring in anticipation of improved consumer confidence later this year and into 2011. The improvement in confidence may be tied to the results of the mid term elections in November.

The importance that is placed on consumer confidence is valid from the standpoint that consumer confidence tends to lead the direction of the stock market. Consumer confidence does have a direct impact on consumer spending. And with consumer spending accounting for over 70% of GDP, improved consumer confidence and a concurrent improvement in consumer spending, an improvement in economic activity likely follows.

From The Blog of HORAN Capital Advisors

In recent discussions with business owners, accountants and attorneys, one theme that is repeated frequently, is the fact businesses are not making hiring or expansions plans due to the uncertainty surrounding future costs related to taxes and health care regulation. If a change in control of Congress provides more clarity on the regulatory environment, this could positively impact business expansion and hiring plans.

From The Blog of HORAN Capital Advisors

Source: Gallop

As I noted in a post about a month ago, a change in control with Congress can have a positive impact on the economy and the stock market. The below chart shows the current market advance relative to the market returns achieved after the midterm elections in 1994, when a democratic congress switched to a republican majority.

From The Blog of HORAN Capital Advisors

Given recent polling data, it seems probable that we will see a change in control of congress in the mid term election this year as well. After the 1994 midterm, the market advanced over 34% in 1995. For investors, an important question is how much of the market's recent advance is pricing in this potential election outcome. Further, if a change in Congress is not realized it is likely the market will not react favorably.