Confidence Is Everything: 3 Things May Shake It

Key Points

  • Confidence matters; faith in a brighter future drives risk taking, fueling growth through investment and consumption.

  • Real-time measures of confidence by consumers, analysts, and business leaders continues to improve.

  • Three potential developments over the rest of the year could shake confidence: the virus progression as schools and universities reopen, the ramifications of the U.S. election, and the outcome of post-Brexit trade talks.

The old adage “confidence is everything” applies to the economy as it does to how we approach our lives. While it’s true that too much confidence can be a vulnerability, too little can be worse by allowing negative feedback loops to deepen. Low interest rates simply can’t boost borrowing if confidence remains weak. Rising confidence is generally a positive; faith in a brighter future drives risk taking, fueling growth through investment and consumption. Keeping tabs on measures of confidence by consumers, business leaders, and analysts may tell us about what’s ahead for the economy, earnings, and the stock market. Confidence has been on the rise, but faces three big risks during the next three months.

Improving consumer confidence

Official consumer confidence survey results are generally reported on a monthly basis. However, a lot can happen in a month, so we prefer indicators with more frequent updates on how consumers may be feeling. One real-time gauge of consumer confidence is restaurant reservations. Although the data is limited to a relatively small number of major countries, the trend in seated diners at restaurants on the OpenTable reservation network since re-openings began in May has been on the rise, as you can see in the chart below. Although there is some recent softening in Ireland and Germany, the trend still reflects growth from the same period a year ago. Improving real-time readings on consumer confidence can also be found in weekend cinema box office revenues and shopper traffic in retail stores.

Rising restaurant reservations on OpenTable network (7 day moving average)

Source: Charles Schwab, data as of 8/13/2020.

Improving analyst confidence

Earnings results for the second quarter and guidance for the rest of the year have been better than Wall Street analysts had been expecting, likely giving a boost to their confidence in an earnings recovery. In fact, upward revisions to analyst earnings per share (EPS) estimates in August are exceeding downward revisions for the first time since February.

Analyst upgrading their earnings outlook

Source: Charles Schwab, Factset data as of 8/13/2020. Past performance is no guarantee of future results.