Getting sentimental

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CEOs Feel Crash Coming, But Consumers Are Confident — Who’s Right?

There’s an interesting dichotomy right now between consumer sentiment and the word in the C-suite. The feelings in both arenas are pretty crucial, since consumer spending is a huge engine of growth and enterprise spending on technology and capital goods is equally important to the broader economy.

Yet strangely enough, the two groups seem to be pointing in decidedly opposite directions in their outlook right now.

First, let’s look at the spring that American consumers have in their step:

  • After sentiment dropped to the lowest level since 1980 in August of 2011 thanks to debt-ceiling debacle, consumer confidence has come roaring back. Now, according to the University of Michigan/Reuter’s survey in September, consumer confidence is at its highest level in over five years.
  • Housing seems to have arrived near the bottom, and is perhaps even building a recovery. Home prices are back to 2003 levels and new construction is at a four-year high. It’s no surprise that housing stocks across the board from retailer Home Depot (NYSE:HD) to builder Toll Brothers (NYSE:TOL) to mortgage servicers like Nationstar Mortgage Holding (NYSE:NSM) have all rallied significantly in the last few months.
  • Unemployment is at the lowest level since President Obama took office in January 2009, at 7.8%. That’s still high, to be sure, however the Real Time Economics blog over at The Wall Street Journal points out that employees are starting to get their confidence back as workers are quitting far more often than they get laid off these days.

Taken together, it certainly seems that the average Joe is feeling pretty good and consumer confidence is fueling decent spending. And it’s not hard to understand why — presuming they have a job and decent credit, now is the perfect time to buy flashy new technology on the cheap or take out a low-interest mortgage on a home or car.

How about the CEO outlook, though, beyond consumer sentiment?

  • In late September, the Business Roundtable of CEOs from the largest U.S. corporations offered its Economic Outlook Index, which plunged to the worst level since Q3 2009. It was the third largest drop in the index’s history — with the details showing a mere 30% of CEOs looking to increase capital expenditures and 34% expecting to lay off workers.
  • Morgan Stanley (NYSE:MS) also issued its Business Conditions Index recently, which saw optimism drop sharply to 41% in October, according to Business Insider. Equally bad was that its “hiring plans index” component hit the worst level since August 2009.
  • And forget just the bigwig CEOs — small businesses are pessimistic, too. According to the National Federation of Independent Business, optimism slipped in September and data pointed to “scaling back hiring plans, rethinking expansion and fretting over weak sales as they wait for stability,” according to the Los Angeles Times.

So who’s “right” on this? Are consumers correct in their feelings that they can freely spend and find work elsewhere voluntarily? Or do corporate executives really understand the big picture and troubles abroad in ways the typical American simply cannot (or refuses to) understand?

It’s an interesting juxtaposition. Of course, it must be admitted that there might be a confusion between “pessimism” and “uncertainty.” Many businesses are in a wait-and-see phase right now with the looming November election and questions about the fiscal cliff debate that will occur soon after. And the timing couldn’t be worse, as many corporations plot their 2013 plans right before the holidays and are trying to think long-term despite these unresolved issues.

But any way you slice it, there’s a divide here between businesses and consumers. Whoever wins this tug-of-war could define what happens to the stock market in 2013 — and what kind of companies come out ahead.

If businesses continue to cut spending, expect enterprise IT stocks like Cisco (NASDAQ:CSCO) and IBM (NYSE:IBM) to see softness, as well as industrials like Caterpillar (NYSE:CAT) and General Electric (NYSE:GE). And if consumers continue to remain confident, housing stocks could continue to heat up and retailers from Gap (NYSE:GPS) to Target (NYSE:TGT) could go along for the ride.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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