Falling Consumer Sentiment

Good morning. I hope your week is going well. Before we get started I wanted to let you know that I’ll be skipping next week’s post as I’ll be out of the office on Monday and that’s when I usually write these.

The stock market dipped a bit last week in part due to news about falling consumer sentiment. I wanted to spend a few minutes looking at this because while sentiment news can move markets in the short-term, it also has broader implications for the economy and topics like inflation as well.

The University of Michigan is among the most prominent of many organizations that track this stuff. Last week they said sentiment fell 10% from January after January fell from December. Sentiment declined among all consumers surveyed, however there were notable differences between income, wealth levels, and political affiliation. Consumers mentioned tariffs as one their largest financial concerns, although those responses were mostly from Democrats and Independents apparently regardless of household income level. Republicans reported being concerned about these issues but much less than others and their general sentiment levels were unchanged from January.

Consumers also mentioned inflation as a key concern. Here as well Democrats and Independents said inflation is growing a problem while Republicans disagreed. All told, consumers who were surveyed expected inflation to keep rising to over 4% this year and that rising prices for durable goods like computers and cars would rise the most, driven primarily by potential tariffs. That’s a reaction to very recent news but how long these pessimistic feelings persist is an open question. Beyond that it’s incredibly difficult, if not impossible, to determine which side’s outlook is correct because their views seem so different.

Probably like you, I don’t have a clear answer for why this dichotomy exists, but it’s hard to ignore a chart like the one below that comes from my research partners at Bespoke Investment Group using University of Michigan data.

Here’s another chart, this time from University of Michigan itself showing consumer sentiment broken out by income, regardless of political affiliation.

And here’s another chart demonstrating how the more assets you have the less inflation seems to matter.

Here’s the story from the University of Michigan so you can read more if you like.

https://news.umich.edu/consumer-sentiment-drops-as-inflation-worries-escalate/

On the heels of the consumer sentiment news last week we also have the Wall Street Journal reporting that the top 10% of earners (households earning at least $250,000 per year) are fueling half of the consumption within our economy and perhaps a third of our gross domestic product. This is a record based on over three decades of data when spending from this group accounted for 36% of consumption.

The article didn’t mention political affiliations but focused on how households with assets like houses and exposure to the stock market did much better coming out of the pandemic than pretty much everyone else. That’s not necessarily new information but what’s new is breadth of its impact.

The following chart from the article shows that higher earning households were able to save more during the pandemic and these savings often bought more assets versus going directly into consumables. Government stimulus, Federal Reserve policy, and a variety of other catalysts helped these assets appreciate which lessened the impact of inflation for those holding the assets. It also boosted the wealth effect for these households which, in turn, helps boost their spending. It’s a virtuous cycle that unfortunately has driven the wedge deeper between those with assets and those without.

I’m posting a link to the article below and can send it to you from my account if you hit the paywall.

https://www.wsj.com/economy/consumers/us-economy-strength-rich-spending-2c34a571?mod=hp_lead_pos8

Okay, so what are the investment implications related to these news stories?

Consumer sentiment is considered a leading market indicator but it can also be a coincident indicator when consumers appear to react to news in real time, such as over the past month. It’s not a good predictor of a market crash but it’s a pretty good recession indicator and that makes sense. If consumers pull back meaningfully on their spending long enough for any reason, that causes ripples since our economy gets roughly 2/3rds of its business from them. But if a relatively small number of households can support half of our total spending and those consumers remain happy, maybe that could help drag the economy along while the rest stabilizes? None of this means we’re in for a recession or major market decline in the near-term, but it’s a warning sign to pay attention to for sure.

That said, try to avoid making major changes within your portfolio if you’re feeling nervous (which is a reasonable response, by the way!). Instead, rebalance your portfolio by selling some stock investments that have been doing well and use the proceeds to pay down/pay off debt that’s more expensive than, say, 4% per year. Other than that, you could make market gains real by paying for trips, gifting stock shares to family or charity, buying a vehicle, or completing overdue home maintenance. Or you could simply generate some extra cash for spending over the next year or two if you’re retired. In short, stock market returns have been good for a while so it’s prudent to take some off the top where appropriate and get some things accomplished. Just don’t let headlines push you too far away from your long-term plans. Otherwise, rebalance from stocks to bonds as appropriate and remember that if you’re still working and saving for retirement (or you’re not relying on your investments for retirement income), meaningful market dips along the way are buying opportunities.

Have questions? Ask us. We can help.