Signs of consumer and investor confidence

Consumer and investor confidence are often intangible but so very important to economic growth and stock market performance.

With the Dow Jones setting a new record high level yesterday, and other global stock markets climbing higher, there is clearly a return to risk taking place.

Whether this represents a Great Rotation from gilts to risk assets or not remains to be seen.

Despite dire warnings to the contrary, gilts appear to be holding up well as cash is found from elsewhere to support equity market valuations.

The longer term outlook for gilts and corporate bonds, away from higher yielding corporate and emerging market sovereign debt, looks less cheerful; but in the short to medium term perhaps there is less chance of a bond bubble bursting than often suggested.

Another sign of consumer confidence is highlighted with the news that UK house prices continue to improve.

According to Halifax, house prices rose by an average of 0.5% in February, which means property values are 1.9% higher than they were this time last year.

The average value of a property in the UK is now £163,600.

House prices are a good (and rather more tangible) indicator of consumer confidence. More than simply dinner party conversation, they give consumers the confidence, or not, to spend money on the High Street and generally boost the domestic economy.

That house prices have risen over the past year – and during the past couple of months – despite the banks still failing to lend is a promising sign of impending economic recovery.

In a way, it is similar to investors having confidence in the stock markets despite a weak and often febrile economy.

Investor and consumer confidence can and often is detached from the current reality of the economy.

We don’t necessarily need impressive GDP growth or properly functioning banks to see a stock market rally or healthy house price growth.