Market Volatility Shakes Confidence

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L.A. County residents’ confidence in the economy continued to slide in the first quarter, led by a sharp drop among residents 55 and older concerned that the recent stock market volatility could harm their portfolios.

That’s the overview from the quarterly consumer sentiment survey of the L.A. market by the Lowe Institute of Political Economy at Claremont McKenna College. The index for the local economy fell to 89.4 during the first quarter from 92.1 the previous period, and from 106.6 a year ago.

The latest reading of Angelenos’ confidence levels in the national economy fell slightly more on a quarter-to-quarter basis during the first three months of the year, to an index reading of 90 from 94.1. The national drop was slightly less that the local dip on year- to-year basis, falling from 104 in the first quarter of 2017.

A baseline index reading of 100 was set in the second quarter of 2015 for the index, which debuted last year.

The indices for consumer sentiment on the local and national economies are the first of their kind for Los Angeles. It is produced through an alliance between the Lowe Institute and Chapman University in Orange.

The first quarter reading was from a sampling in March of 500 Los Angeles County residents who answered questions about their current economic situation; their outlook for their own finances and spending in coming quarters; and their outlooks on both the local and national economies.

The survey came against a backdrop of a local economy many consider to be at or near full employment, with a jobless rate of 4.5 percent and a near-record 4.46 million payroll positions countywide.

But the stock market’s gyrations that began in late January took their toll on local consumer sentiment, especially among those 55 and older. Among that age group, confidence in the national economy plunged 19 percent, more than four times the overall drop.

“The decline in consumer sentiment among those 55 and over is likely driven by anxiety over the stock market jitters that began in late January,” said Cameron Shelton, director of the Lowe Institute and associate professor of political economy at Claremont McKenna. “Households nearing retirement typically have a nest egg invested in the stock market and are projecting their retirement income based on the performance of that portfolio.”

The Standard & Poor’s 500 Index – one of the broader market indices – began to drop in late January, and eventually fell by around 10 percent before a partial recovery followed by significant swings both ways.

“Because a correction like this hadn’t happened in a while, the headlines were everywhere and that made some of my clients a little antsy,” said Miguel Sanchez, a downtown-based senior financial advisor with Merrill Lynch & Co.

Sanchez said roughly 10 percent of his nearly 100 clients – including some of his older clients – were concerned about what impact the volatility would have on their portfolios.

“The older clients are most concerned about rising health care costs,” he said. “But some are also concerned that if the market goes through more corrections in the near term or continues being choppy, they might not have enough saved in their portfolios to meet those health care costs and other living expenses, too…I have had to reassure them about the diversity in their portfolios.”

Stock market volatility likely also affected the sentiment of respondents with annual incomes in the $100,000 to $150,000 range, according to Shelton. That group, which generally puts a lot of their income in the equity markets, registered a 10 percent drop in sentiment.

Shelton said that market portfolio concerns might also have played a role in responses to another question in the survey: whether the next 12-month period would be a good time to buy a car. The index reading on that question fell nearly 8 percent during the first quarter to 87.7, significantly below the second quarter 2015 baseline of 100.

“The percentage of people willing to buy a car speaks directly to portfolio wealth,” he said.

Rising interest rates also might have influenced the drop in willingness to make car purchases, he said. After a several years hovering at 3.25 percent, the prime interest rate rose slightly last year and in recent weeks has jumped to 4.75 percent; many car loans are a percentage point or two above that. The environment of rising interest rates also means there generally are fewer zero-interest rate new car loans.

Trade war jitters?

Shelton said the stepped-up tariff rhetoric in recent weeks between President Donald Trump’s administration, Chinese leadership and other trading partners may also have had an impact on local consumer sentiment.

“Many here realize that our economy is more sensitive to disruptions in trade that could come as a result of tariffs or trade war,” he said. “We are an area that is generally open to trade and the media coverage here is not generally upbeat about trade-war rhetoric.”

But one local trade expert said the trade rhetoric may have had limited impact on broader consumer sentiment here.

“I think Angelenos are not aware how much our economy is dependent on trade,” Stephen Cheung, president of World Trade Center Los Angeles, said in an email. “Many in the region are surprised that we have…two ports here, let alone the impact of the ports. Also, many aren’t aware of all the foreign direct investment that has driven much of the downtown development over the past few years.”

Cheung speculated that consumer sentiment would likely have dropped more than it did in the first quarter if people in general were more aware of the role that trade plays in the local economy.

Left behind

Another very large difference in respondent groups came in employment status. Respondents who were fully employed during the first quarter showed an increase of 5.5 percent in their consumer confidence index reading. But respondents who were employed part-time or “self-employed” showed drops of 17 percent and 18 percent respectively.

“The better the economy is, the worse you feel if you are not fully employed,” Shelton said. “It’s a feeling of being left behind.”

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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