As Consumer Mood Sours, Are Investors Overlay Optimistic?

Why U.S. stock markets may reflect too much optimism about consumer spending, heading into what could be a subdued year-end shopping season.
By Lisa Shalett –  U.S. consumers have a lot on their minds recently, weighed down by the coronavirus Delta variant, a more-sluggish-than-expected jobs recovery, inflation worries and the spectacle of political wrangling in Washington, D.C. At the same time, financial markets seem to be “climbing a wall of worry,” confident that these growing anxieties about inflation, supply-chain disruptions and the economic drag from the pandemic will soon pass.

We believe the consumer perspective warrants attention. Negative sentiment, especially heading into the year-end holiday season, could presage market weakness, catalyzed by lower-than-expected spending and disappointing corporate earnings.

Let’s first consider that consumer confidence and stock market moves have historically been well correlated; any notable divergences tend to be short-lived. But today, the gap between the two remains uncharacteristically wide. On the consumer side, the Conference Board’s confidence index fell in September for the third straight month, with the gauges of current and future conditions at 5- and 10-month lows, amid lingering concerns over higher prices and a slow job-market recovery. Note that job growth stalled again in September, missing estimates and signaling that the forces holding back hiring or returning to the workforce may persist.

At the same time, investors’ “buy the dip” mentality, anchored by a belief that inflation is transitory and corporate margins will be sustainable, has bolstered the stock market. U.S. equities did hit a rough patch in the third quarter, but the downturn was contained to within 5% of the pre-Labor Day highs, and advances so far in October suggest that the third-quarter speedbumps may now be behind us. more>

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