Confidence is an interesting thing. 

It is difficult to define, but you know it when you see it. When you have complete confidence in what you are doing, you are able to perform up to - and sometimes beyond - your abilities. Confidence allows you to perform to the best of your ability without worrying about failure. If you are familiar with the world of elite Super Grandmaster chess, you know Magnus Carlsen exudes confidence.

Carlsen is the reigning world chess champion after successfully defending his title for a second time recently against Viswanathan Anand, a former 5-time world champion. At only 24 years old, Carlsen was the third youngest chess player ever to become a Grandmaster (at the age of 13 years and 148 days) and the youngest in history to be ranked #1 in the world (19 years and 32 days old). His peak "chess rating", using the standard system devised by Arpad Elo in 1960 to rate elite chess players based on performance, was 2,882 in May 2014 and the highest rating ever recorded. In their heyday Chess legends such as Garry Kasparov and Bobby Fischer came close (2,851 and 2,785, respectively), but nowhere near Carlsen's rating which is truly unbelievable. 

While most chess grandmasters relentlessly focus on "openings" (the crucial first dozen or so moves of chess matches), Carlsen dominates his opponents through "positional play" (a focus on gaining advantage on the board through long-term maneuvering) during the "middlegame" and establishing brutalizing "tactical play" (short-term attacks; the opposite of positional play) in the "endgame". The final endgame in the November match against Anand is recreated by your humble correspondent in the above photo shown from Carlsen’s “white” perspective. Carlsen's key defining feature is his confidence level at all times during the long hours and days of championship match play. His mental toughness and confidence gained through thousands and thousands of hours of practice gives him the edge needed to succeed at that level.

Sounds like the U.S. consumer is behaving a bit like Carlsen these days as well. First, Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment in December came in at 93.8, the highest reading since January 2007, and better than the final November reading of 88.8 (see chart below). The consumer sentiment gauge is a measure of consumer confidence and how they feel financially about their present and future situations and one of two key consumer confidence readings followed by economists. 

Not only are consumers feeling confident, but they are acting confident as well: November retail sales as measured by the U.S. Census Bureau rose 0.7% from the October level and a whopping 5.1% from November 2013. Both readings were better than economists polled by Bloomberg Financial were forecasting. 

Economist reactions to the data confirm the relationship; from the Los Angeles Times:

"Most measures of confidence seem to be trending higher. It appears that consumers are getting the message and going out and spending...Spending is on a positive trajectory. This is good news for the holiday spending outlook." - Scott Hoyt, Senior Director of Consumer Economics at Moody's Analytics

"The U.S. has now enjoyed 50 consecutive months of job creation, a record. All this means that U.S. consumers have more money in their pockets to spend on goods and services."  - Joseph Lake, U.S. Analyst for the Economist Intelligence Unit

As more and more signs point to continued and, maybe, accelerated economic growth in the U.S., the "middlegame" of the U.S. business cycle will come to pass as the Federal Reserve Bank embarks on removing monetary policy accommodation (i.e. increasing interest rates). It will be interesting to see if the U.S. consumer can keep his and her confidence like Carlsen through the "endgame".

 

Past performance is not a guarantee or indication of future results.