People are getting euphoric out there. Maybe all the negative campaign ads are having a reverse psychology effect. Or maybe the signs of life in the housing market have reanimated dormant animal spirits. Whatever the cause, the Conference Board's Consumer Confidence Index has surged to its highest level since early 2008.
Yet at the same time, big money managers on Wall Street are just about the most pessimistic they've been in 14 years, while newsletter writers are also gloomy. And as I've been writing about for weeks, CEO confidence is way down, as are hiring and capital spending plans, with expectations for the future back at late 2008 levels.
So, who is right? Consumers or Wall Street and the CEOs?
As I've said before, CEOs have historically had a better read on what's around the corner. They watch the intersection of demand, supply, and pricing and see the data in real time. Investors are a little behind the curve, since the data they use is at least one month old (major economic figures) or as much as three months old (corporate earnings).
And while stocks have been bouncing around recently, the truer story is being told in ancillary markets, which are suggesting "risk off." Treasury bonds are basing nicely as buyers seek a safe haven. Commodities remain under pressure. The CBOE Volatility Index ($VIX +2.38%) -- Wall Street's "fear gauge" -- is perking up. And junk bonds, which are one of the best gauges of investor confidence, are dropping out of a consolidation pattern and threatening to fall through a 50-day moving average for the first time since the May market meltdown.
What sends this thing over the cliff? A weak jobs report? The outcome of the elections? The economic context is still negative.
If Obama wins, Congress will resist a push for more taxes. If Romney wins, a Democratic Senate will resist maintenance of the Bush tax cuts. The "fiscal cliff" of spending cuts and tax hikes worth some 5% of GDP is still out there -- with the added complication of the Treasury hitting its $16.4 trillion debt ceiling sometime in January or February. The economic consequences of CEO nervousness and a pullback in capital expenditures and hiring plans are still out there.
And in Europe, Germany isn't happy about the growing need for debt writedowns for Greece, nor is Greece happy about the austerity terms Germany is pushing. A Greek court today warned that planned pension cuts and retirement age increases may be unconstitutional, even as the coalition government is losing support from its leftist members.
For now, I am looking to Friday's jobs report for an indication as to who's right. I continue to recommend my clients and readers maintain a defensive posture by focusing on picks like the Direxion 3x Treasury Bull (TMF -3.09%).