Consumer Sentiment Is At Historic Low

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The “new high” media reports, the Fed’s lower interest rate, and AI speculation have supported investor optimism so far. However, the key support of the economy is consumer spending, and consumers are expressing significant pessimism. Therefore, we may be at one of those fragile stock market peaks that suddenly turns into a surprising downtrend.

The consumer sentiment readings

The University of Michigan has conducted measurement of consumer sentiment for 70 years. Looking at that history is valuable because consumer trends tend to last and changes reflect important developments. (Their website has full explanations of how they conduct the survey.)

Below is the entire history graph. The green dashed line shows the initial surveys – first semi-annual ones, followed by quarterly ones. The solid blue line shows all survey results after they changed to monthly. The shaded areas are the recessions.

Where consumers turned pessimistic

The consumer sentiment readings are based on survey questions split between current conditions and expected (1-year and 5-year) developments. An important survey subset is the individual/family personal financial conditions. Usually, when that current sentiment is very low, expected sentiment is above. The reason is that consumers understand that economic and financial problems are normally cured. However, both current and expected sentiments now are at their similar lows. Likely, this means consumers now have longer-term pessimism that could weaken major purchase plans.

So, why is the stock market up?

Investor sentiment reflects the stock market’s supposed optimistic measures. However, important fundamentals are deteriorating throughout the S&P 500. See “Stock Market: Consumer Inflation Shifts Appear To Be Weakening Corporate Growth” for a sample of this reality. Note the shift from the initial stock runups, followed by the drops caused by consumer reactions to the continuing inflation. (See “Stock Market: Companies Are Struggling With Inflation-Driven Consumers” for more explanation.)

Such a mix of optimism and negative reality will not last. Without a positive shift in fundamentals, a surprise selloff could result. With the large gap between the investor attitude highs and the consumer sentiment lows, such a reversal could be sizeable.

The bottom line: The media is not Wall Street

When sudden shifts occur in the stock market, particularly selloffs, the media will report that nobody saw it coming. That view is never accurate. Selloffs do not suddenly appear. Instead, when Wall Streeters (meaning savvy investors) sense a possible weakness ahead, they begin silently selling into the rising market. They neither dump their holdings, nor advertise what they are doing and why. Doing so would harm their results.

Instead, it is after the market is clearly stumbling and the Wall Streeters have repositioned themselves that they will discuss the problems. Also, remember that some will have sold short. Being committed to the selloff, those are especially willing to talk to the media.

And of course, this process works in reverse when Wall Streeters see reasons to buy in a falling market.