Things must be going well. Chief Executive Magazine's June CEO Confidence Watch found that "confidence has reached its highest level since we launched the Index in October 2002." Last week, the Business Roundtable reported that the June version of its CEO Economic Outlook Survey—launched in November 2002—similarly plowed ahead. Fully 88 percent of the 116 CEOs who responded expect sales to rise in the next six months. And for the second straight month, "a larger percentage of CEOs are projecting their companies will add jobs than are expecting employment declines."
It's nice that CEOs are feeling optimistic. Good for them. And, according to the top-down leadership style still in vogue at Fortune 500 companies, good for us. After all, even as they labor under the putatively onerous Sarbanes-Oxley regulations, CEOs still make the ultimate decisions about hiring and firing, investing capital, and acquiring companies. As goes the collective mood of blue-chip CEOs, so the nation should follow.
But there's plenty of reason to be suspicious of CEO confidence as a leading indicator. If anything, it seems to be a trailing indicator. When they get too confident, watch your wallet. Check out the correlation between the CEO Confidence Watch and the Dow Jones Industrial Average on Page Two of the release. The two indexes seem to move largely in tandem, with CEO confidence lagging a bit behind.
The stock market slump in the spring of 2003 coincided with the start of the invasion of Iraq. You can understand why nervous investors fled volatile stocks for the relative safety of gold and bonds in that period. But why did CEOs collectively lose their nerve? CEOs are supposed to have a certain Olympian calm. As we are constantly assured in annual reports and CNBC interviews, they are relentlessly focused on the fundamentals of the economy, the markets in which they compete, and their companies' operations, and never—never!—on the daily fluctuation of their stock price. In the spring of 2003, the economy was growing twice as rapidly as it was in the fourth quarter of 2002, interest rates were low, and profits were rising smartly, yet their confidence sagged. In fact, you might conclude that CEOs' confidence has less to do with economic fundamentals and a whole lot to do with how the overall market is performing—and hence whether the value of their shares and options is rising or falling.
CEOs don't seem to have a better handle on the economy's prospects than the average mutual fund investor. CEOs seem to be slow on the uptake. According to the CEO Confidence Watch, in the third quarter of 2003, when the economy was cooking at an 8.2 percent annual clip, only about 10 percent of CEOs described business conditions as "good." Today, with the economy growing at half that pace and with interest rates on the rise, some 44.6 percent do. (It's a shame these surveys didn't start in, say, 1999. It's a good bet that—just as investors did—CEOs would have shown extremely high levels of confidence at the very moment when things were about to take a turn for the worse.)
CEOs may be among the last in the company to learn what's really going on. Sales data can be delivered instantaneously to the desktop of the CEO. But in practice, it still flows up the organizational chart. Who would you expect to have the first inkling that the new all-white meat Chicken McNuggets are selling well—a store manager or the CEO?
There's also a certain amount of upward bias built into the CEO confidence surveys. Confidence and optimism are the CEO's job. Pretty much all CEOs have to believe their sales will increase—otherwise they'll have a hard time attracting investors. Every CEO expects to grow market share and increase the top and the bottom line every year—even though the rules of the marketplace dictate that not all of them can. They're not lying. They simply have confidence in their employees and their strategy. And when they don't have confidence, they have to fake it. They're like baseball managers. Realistically, many emerge from spring training knowing they have no prayer of competing for a playoff spot. But stating the obvious would be poison for all constituents—the team, the fans, owners, and the media.
Bulls cite the rise of CEO optimism, and particularly their expectations that sales and employment will rise, as good news for the stock markets and the economy as a whole. But since these measures were started, it turns out the best time to buy stocks has been when CEO confidence was at its lowest. So, now that CEO confidence is at its highest, what should you do?