A Summertime Thawing of Sentiment?

Last week, we noted moods appeared to be improving based on the reaction to the US June CPI report. Yet there is more evidence the dire pessimism prevalent last year is easing: the latest batch of sentiment surveys. In our view, these polls are one way to see nascent warming. Some pessimism remains, and skepticism abounds, but it seems thawing is starting to happen—as we would expect nine-plus months into a bull market.

We will start in America, where the University of Michigan’s (U-Mich) widely watched Index of Consumer Sentiment registered 72.6 in July from June’s 64.4—its second-straight monthly climb and well ahead of consensus estimates of 65.5. July’s number was the highest reading since September 2021—a year and a half after the lockdown-induced bear market ended—and the largest monthly advance since 2006. All underlying components improved, led by a jump in long-term business conditions, as the survey credited the rise to the ongoing slowdown in inflation and a resilient labor market.

Now, this doesn’t mean US consumers are feeling super chipper. July’s preliminary estimate is still well off February 2020’s prepandemic level, and moods remain down relative to the past 20 years. (Exhibit 1)

Exhibit 1: U-Mich’s Consumer Sentiment Index Since 2000

Source: FactSet, as of 7/14/2023. Recession dating based on National Bureau of Economic Research’s Business Cycle dating.

But things seem to be stabilizing—even across party lines. U-Mich survey respondents identifying as Republican have been more dour about the economy than those who identify as Democratic since November 2020, when the White House flipped from Republican Donald Trump to Democrat Joe Biden. That isn’t a surprise to us, as people tend to feel more optimistic when their preferred political party is in power—and worse when their party is the opposition. That said, both groups reported an uptick in moods in July, perhaps signaling Americans have noticed cooling prices. (Exhibit 2)

Exhibit 2: Some Improvement in Moods, Regardless of Party

Source: University of Michigan, as of 7/14/2023. January 2020 – July 2023.

Some other prominent polls echoed U-Mich’s findings. For example, the US National Federation of Independent Business’s (NFIB) Small Business Optimism Index climbed to a seven-month high in June on some improvement in the economic outlook. Still, inflation worries persisted, and moods remain historically low: June was the 18^th straight month the NFIB index was below its 49-year average. In the Land Down Under, Australia’s Westpac Consumer Sentiment Index ticked higher in June as slowing May inflation seemed to boost confidence. But as in America, Aussie sentiment remains mired in a deep pessimism that has persisted for over a year.

Poor moods are even more prevalent in Europe. Research outfit sentix shared bleak expectations in the eurozone, as its economic index fell a third straight month in July to its lowest level since November last year, when energy security fears dominated. Sentix attributed the decline to “recessionary circumstances” and few signs of improvement ahead—and explicitly called the situation in Germany “dramatically bad.” The ZEW institute reported a similar finding, noting a fall in German investor confidence in July—its gauge of expectations dipped to -14.7 from June’s -8.5—due to rising global interest rates and weak export demand from China (with the latter knocking Germany’s industrial sector).

These findings provide a snapshot of where moods are today. Yes, outside Europe, sentiment is improving relatively speaking. But in an absolute sense, we are far from broad-based optimism. Moreover, it isn’t a shock to us that worsening economic data is making folks more pessimistic in Europe. But while poor numbers can ding sentiment in the short term, the latest data don’t reveal anything new to stocks, especially since economists have been discussing the prospect of a deep eurozone recession for more than a year now. Surprises move stock prices most, and eurozone economic weakness doesn’t fit the bill, in our view.

That goes for most of the concerns highlighted in the latest sentiment surveys, too. In our view, stocks have already digested issues like elevated inflation and moved on. We don’t deny economic conditions remain challenging globally. Nor do we dismiss the possibility of recession. But old, recycled fears remaining atop headlines and people’s minds suggests the young bull market has plenty of wall of worry to climb. As legendary investor Sir John Templeton put it, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” We may be nine months removed from that initial deep-seated pessimism, but it doesn’t mean we are out of it yet—a reason to be bullish, in our view.