Consumer confidence nears all-time lows: Is there more pain for ASX discretionary stocks?

Australian consumer confidence levels dipped back towards all-time lows this month, to levels only comparable to recessions in the 1990s, 2008 and 2020.

The Westpac-Melbourne Consumer Sentiment Index fell 6.9% in February to 78.5 points. This was a touch above the 78 read in November but below the low point of the Global Financial Crisis (79.0) and marginally higher than Covid lows of 75.6.

Source: Westpac

Interest rates were the most apparent factor weighing on confidence in February, according to the report. Sentiment amongst those surveyed before the RBA's interest rate hike was 83.5 but nosedived to 74.8 afterwards.

Of interest was the "particularly big fall" for attitudes towards major household purchases. The ‘time to buy a major household item’ sub-index nosedived 10.1% to 78, well-below the long run average of 126.

The only periods comparable to the reading were:

• April 2008: When the RBA hiked rates to 7.25%

• October 2008: The height of the Global Financial Crisis

• April 2020: The first Covid wave

"This, and the very weak read on family finances vs a year ago, are a clear warning that consumers are poised to cut back sharply on spending," said the report.

In this piece, I'll be taking a look at how the S&P/ASX 200 Discretionary Index performed during the downturns, when they bottomed and

Discretionary Index vs. Consumer Confidence

The chart below shows the ASX 200 Discretionary Index (Orange) against the Australian Consumer Confidence Index (Blue).

Note: The ASX 200 Discretionary Index only goes back as far as May 2001

The black lines show the bottom of various downturns in consumer confidence (Source: TradingView)

It's interesting to see a divergence between the two indexes: Discretionary bouncing off recent lows while consumer confidence spirals towards all-time lows. Here's some food for thought about the bifurcated market:

• Discretionary is holding up as if there'll be a soft landing

• Consumer confidence is nosediving as if there'll be a hard landing

• The saying goes, stocks often bottom before the economy

• Still, who is leading who?

The next chart notes the lows of ‘time to buy a major household item’ sub-index on the ASX 200 Discretionary chart. That being: April 2008, October 2008 and April 2020.

Source: TradingView

While the sample size is a measly three, all three occurrences did not mark a low for the Discretionary Index.

• April 2008: -48% away from lows

• October 2008: -23% away from lows

• April 2020; -17% from lows

The average distance away from the low was 29% and the average time needed to hit the low was 5.3 months.

There's a little bit of an existential crisis going on with the two pieces of data. However, that's the case with a lot of data these days. For example, the bond market is screaming a recession while economic data is holding up relatively well.

Interest rate hikes has been the main drag on consumer confidence, but the pain isn't quite over. Economists expect another two 25 bp rate hikes in March and May, which would mark 11 consecutive rate hikes and bring the cash rate to 3.85%.