The Wobbly Warming of Sentiment

The University of Michigan (U-Mich) released the preliminary July results of its widely watched US consumer sentiment measure recently, and whilst the survey reflects US consumer views, we think the takeaways apply to a theme we have observed globally: Sentiment continues warming toward optimism—but isn’t frothy—a positive backdrop for global stocks, in our view. 

July’s Index of Consumer Sentiment fell to 66.0 from June’s 68.2, a “statistically insignificant” dip, per U-Mich.^[i] About half of respondents complained about stubbornly high prices, though they anticipate ongoing moderation in inflation (economywide price increases) in the coming years.^[ii] Most of the financial coverage we follow focussed on this takeaway, noting the understandable frustrations with the cumulative increase in consumer prices since inflation started spiking.^[iii]

We also saw some analyses highlighting how sentiment and outlooks amongst respondents who identify as Democrats fell to their lowest level since May 2023, tying the decline to President Joe Biden’s performance in the first presidential debate. U-Mich argues otherwise, saying there was little evidence the first presidential debate altered respondents’ views.^[iv] Perhaps, though the expectations gauge for Democrats did fall -13 points from June—which isn’t nothing, especially compared to the -1.6 point dip amongst independents and the 1.5 point increase for Republicans.^[v]

Whilst we wouldn’t draw any big takeaways, positive or negative, from one month’s data, July’s reading fits with sentiment’s trend of choppy improvement over the past two years. (Exhibit 1)

Exhibit 1: U-Mich’s Index of Consumer Sentiment, July 2019 – July 2024

Source: FactSet, as of 16/7/2024.

But we don’t think a line chart captures how bleak things felt to many when this measure registered its record low two summers ago.^[vi] For a refresher, nearly 80% of June 2022 U-Mich survey respondents were pessimistic about future business conditions, the most since 2009 (when America was recovering from the global financial crisis).^[vii] Some experts warned the uptick in the index of future inflation expectations would convince the Fed to keep interest rates high—an alleged policy mistake that could hamstring growth.^[viii] We read others who claimed America’s economy was about to enter (or already in) recession (an extended economic contraction), and at the time, stocks were in a mild bear market when measured in US dollars—one driven primarily by sentiment, in our view, tied to fears over inflation, the Fed’s aggressive rate hikes, Russia’s Ukraine invasion, energy price spikes and supply chain chaos.^[ix]

As Exhibit 1 shows, sentiment didn’t improve in a smooth, upward manner after that June 2022 low. It bounced around, even after a global bull market began in October 2022.^[x] Elevated prices and recession forecasts still weighed on moods going into 2023, based on our coverage of financial headlines. But the alleged worst-case scenarios didn’t come to pass, and the U-Mich sentiment index is now more than 30% above its June 2022 low.^[xi] Still, when you look at the path in Exhibit 1, whilst it depicts warmer sentiment, its chop doesn’t suggest sky-high spirits that could tee up market disappointment, in our view.

Other metrics echo that view. The Conference Board’s Consumer Confidence Index has traced a similar trajectory since summer 2022—warmer sentiment, but not hugely so, and with a lot of wobbles. (Exhibit 2)

Exhibit 2: Conference Board Consumer Confidence Index, July 2019 – June 2024

Source: FactSet, as of 16/7/2024.

Or compare Bank of America’s monthly fund manager survey’s findings from July 2022 and now. Back then, global growth projections fell to an all-time low and recession forecasts hit their highest since May 2020.^[xii] Today, a majority anticipate slowing economic growth, and geopolitics has replaced higher inflation as the allegedly biggest risk to stocks.^[xiii] The NFIB Research Foundation’s Small Business Optimism Index has also improved, hitting its highest reading of the year in June (albeit, still below its long-term historical average).^[xiv] And beyond any specific metric, we have noticed a general shift in tone throughout financial news coverage over the past 24 months. We have gone from headlines asking what is a recession and are we in one? to widespread acknowledgment of a growing global economy.

In general, measuring sentiment is more art than science, in our experience. We have found no single or even a collection of gauges alone captures it. But many widely watched gauges we follow suggest sentiment is warming irregularly from scepticism to optimism—consistent with how a bull market grows and matures, according to our research.