Weekly Update

Consumer Sentiment Reaches Extreme Levels

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Published June 24, 2022


While no one has any clue which way the stock market goes from here, what we do know is that the magnitude of negative sentiment is extreme. The last time we saw consumer sentiment at these levels was in 1980, a dismal period for the economy. The current sentiment reading seems very much at odds with what’s really going on in the economy. Consider the observations below from Delta:

“Efficient markets price in all available information. Sometimes, the information does not make sense and there are disconnects. One of the most surprising disconnects is between consumer sentiment and aggregate demand.

Recently. the preliminary University of Michigan Consumer Sentiment for June came in at 50.2 – the lowest recorded level, ever(!) and comparable to the trough reached in the middle of the 1980 recession. Forty-six percent of the consumers surveyed attributed their negative views to inflation.

Consumer Sentiment

It is hard to imagine the consumer sentiment could be lower than it was in 1980, lower than 2008 and lower than March 2020. Some of the metrics below show no comparison to 1980 and what we are experiencing now:

Metrics comparison 1980 - 2022From 1973 to 1981, the average inflation rate was 9.2%.

Over the past nine years, inflation has averaged just 2.2%. Just a few factors contributing to strong demand are a strong job market, pent up demand from Covid lockdowns and the Fed’s aggressive monetary stimulus which have fattened many bank accounts and asset values. Corporate and individual balance sheets are in great shape.”

This disconnect between horrendously negative sentiment and relatively decent, albeit slowing, economic fundamentals has some calling for a stock market bottom saying that there’s very little bad news left to price in. The future reality may well be better than the dire outlook consumers predict. The question is whether stock prices reflect that very negative sentiment, or not.

Market Update

Investors came into the week reeling from a brutal stretch and needing the Monday holiday to refresh after the S&P 500’s worst week in two years. Cryptocurrencies stopped falling over the weekend and global markets stabilized setting U.S. markets up for a better start to the week. Tuesday brought buyers into the market as U.S. Treasury yields backed off recent highs. The S&P 500 zipped higher by +2.4% Tuesday. Wednesday saw stocks running in place with Fed Chair Powell testifying before Congress. Investors have shifted in recent days to worrying about a recession. But that slowing growth could also lead the Fed to back off raising interest rates sooner than previously expected. That idea has halted the upward trajectory for rates this week, helping rate-sensitive growth stocks regain their footing. Despite a flat day for stocks Wednesday, high-flying energy shares got slammed as recessionary concerns took oil prices down. Commodities and interest rates continued their decline Thursday helping stocks to rebound another +1%. The upswing gained momentum Friday with a +3% rally. FedEx (FDX) delivered solid results while banks broadly passed their annual stress tests, which paves the way for the industry to reward shareholders with higher dividends and stock buybacks.

Stocks rebounded this week after being substantially oversold. The S&P 500 (SPY) recovered by +6.62% roughly recouping the loss from the prior week. The Nasdaq 100 (QQQ) popped higher by +7.46% while smallcap stocks (IWM) posted a +6.00% gain.

Warm wishes and until next week.