Falls in British retails sales, US consumer confidence and stock prices

As many people had feared, Britain saw weak retail sales last month. Yesterday, Britain's National Statistics agency said retail sales were down 1.0 percent compared to November, the largest monthly decline since 1981.

The malaise may spread to the United States. The University of Michigan's consumer sentiment index for January reportedly fell to 95.8 from 97.1 in December. The consumer expectations index fell to 86.4 from 90.9 in December but the current conditions index rose to 110.4 from 106.7.

However, consumer confidence indicators do not correlate well with actual spending. Steve Stanley, chief economist at RBS Greenwich Capital, thinks that consumer spending may have grown by 4.5 percent in the fourth quarter. "Consumer spending was stellar in the second half of last year," he noted, "so the current levels of sentiment are certainly not an impediment to robust advances in actual outlays."

Furthermore, the Conference Board's index of leading indicators did rise last month.

Stock prices, of course, is one of the components of the leading index, and they had contributed to the rise last month. In January, though, stock prices in the US have fallen.

Mark Hulbert, in a recent commentary at CBS MarketWatch, noted a study by Michael J Cooper and John J McConnell of Purdue University and Alexei V Ovtchinnikov of Virginia Tech which shows that, apart from during the 1930s, January has a unique ability to predict what the market will do over the subsequent 11 months. This means that unless the market recovers its losses in the remaining week or so of January, 2005 may turn out to be a down year. Having said that, it may be reasonable to question -- as Hulbert does -- the significance of a finding which ignores the stock market performance during the 1930s.

On a more positive note, though, Hulbert noted in another commentary that sentiment among investment newsletters has become less bullish recently after the market pullback.

"That is definitely encouraging, from a contrarian point of view," he wrote. Not encouraging enough, though, to make him bullish. "I still don't think that [sentiment] has fallen enough to set up a very powerful rally... [O]ver the past five years, the stock market did not produce above-average returns following drops at least as large as the recent one."