Consumer Sentiment Just Posted the Worst Reading In The Past 46 Years
Plus - how the stock market performed during previous low points in sentiment
This morning, the University of Michigan released its most recent survey on how the consumer is feeling. And it was bad. Really bad.
The Michigan Consumer Sentiment Index fell for the third month in a row. Considering the rising costs of pretty much everything nowadays, this isn’t unexpected.
What is unexpected is that the data is suggesting consumers are feeling worse now than they were during the period of high inflation and the aggressive rate policy of Fed Chair Paul Volcker.
In March of 1980, inflation (as measured by the CPI) peaked at 14.8%. Interest rates continued to climb, with the Fed’s target rate aproaching 20%.
For perspective, the latest CPI reading shows prices rose 3.8% annually. And the current Fed target rate is at 3.50% - 3.75%.
By any measure, today's economy is in a far better position than 1980's. Which is what makes the sentiment reading so strange.
So here is where it gets interesting…
Consumers today say they feel worse than they did when mortgage rates were 18%, gas lines wrapped around city blocks, and the Fed was hiking into a recession on purpose.
That should be alarming.
The historical record says it is not — and the reason has nothing to do with sentiment itself. It has to do with what the market consistently does in the 12 to 18 months after readings like this one.
The hard part of being a contrarian is not believing the data. It is being willing to act on it while everyone you know thinks you have lost your mind.
In This Issue:
What happened to the S&P 500 in 1980 — the full move, not just the headline number.
The two other times since 1978 when sentiment dropped this low, and the forward return from each.
The sectors that led the recovery after the Fed raised rates to nearly 20%.
Why every previous low-sentiment episode looked different at the time — and what they all had in common 12 months later.