A confident consumer spends cash and drives economic growth. When that confidence is shaken by, for example, rising prices, then people tend to save rather than spend, thereby restricting that growth. So, the latest GfK consumer confidence survey might have surprised some investors.

The numbers had been falling since August as energy and food costs shot away in the other direction and there were growing concerns about rising cases of Covid particularly in some parts of Europe. But, while consumers are fretting about their day-to-day personal financial health and despite all the tailwinds, Christmas has still come early.

CHRISTMAS COMES EARLY

Forewarned about the prospect of shortages on the shelves, would be Santas have shopped smart and that spend can be seen in October’s retail figures as well as the UK’s latest consumer confidence update. After 2020’s disappointment it seems 2021 is on track to be a Christmas with all the trimmings as people reconnect with family and friends – but how long will the festive glow last?

The answer to that question is something investors need to pay heed to because of the correlation between consumer confidence and stock market valuations.  Investors are consumers too and its not just sprouts they are willing to pay more for if they’re confident about their financial futures.

What is more, consumer spending accounts for a majority of overall economic activity. Wavering consumer confidence means less spending, and that equation can potentially lower profits for consumer-facing businesses. If these latest figures are a blip, which seems more than likely, and the overall trend continues then we are in for some tough months ahead.

It’s not just in the UK where the consumer has been flagging, the latest figure from the US put consumer sentiment at a 10-year low. Rather like here in the UK there have been many positive factors keeping the economy rolling Stateside including rising wages, a healthy labour market and Covid savings.

But rising prices are gradually eroding that optimism, living standards are taking a hit and many people expect any extra they might have accrued over the last year will be wiped out by inflationary pressures.

ARE MARKETS DISCONNECTED FROM CONSUMER SENTIMENT?

The UK market has had a long slow trek back to form, but US markets keep hopping from record high to record high and here there does seem to be a distinct disconnect between buoyant investors and the consumer.

But even if UK markets do appear more grounded in the here and now, there are still questions about how much investors have really priced in the changes anticipated over the next few months.

Despite all the uncertainty and an anticipated, if later than advertised, rate rise on the cards the FTSE 100 clawed its way back to within touching distance of pre-pandemic levels earlier this month.

Gains have been made in the face of outlook after outlook from UK companies which have contained warnings about rising prices and labour and supply shortages, when you look at the fortunes of the FTSE 100 since close of play on the 4 November, when the Bank of England surprised by keeping rates on hold, three-fifths of its constituents have seen share prices rise.

This probably reflects the international horizons of the constituents of the index, but the FTSE 250 is beginning to show signs that investors are paying attention to what’s going on closer to home. Less than half of companies in the index have made positive gains since the Bank of England hold.

Amongst those losing ground are many travel and tourism stocks including TUI (TUI), EasyJet (EZJ) and Wizz Air; cash strapped consumers won’t have the confidence to book ahead, and clearly renewed Covid concerns have also played a part.

And though retailers are enjoying their moment in the sun, even the revived Marks & Spencer’s (MKS) sparkle might start to dim once the rush of gift buying runs its course.

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