Don’t Look for a Rebound in Consumer Sentiment

Editor's Note: There won't be any commentary next week as I will be out of the office.

Don’t Look for a Rebound in Consumer Sentiment

??????The University of MI’s consumer economic expectations keep weakening.

??????The gap in political bias has widened to a new high.

??????Near term expectations are likely to remain under pressure.

The stock market can’t seem to catch a break…

Lately, it feels like investors are constantly having to stomach an onslaught of negative news. One day it’s the threat of a new batch of tariffs. The next it’s a concern the economy is headed into a recession. And another it’s the possibility of a government shutdown.

All of this has frayed the nerves of both retail and institutional investors. They’re uncertain of what the White House is trying to accomplish. And until they have more details, they’re selling first and asking questions later. That has pushed the S&P 500 Index into correction territory for the first time since late 2023…

And while the magnitude of pullback doesn’t feel good, such a move isn’t uncommon. According to Yardeni Research, a drop of 10% or more happens once about every 1.5 years. And given the time frame since the last one, one could argue we were overdue.

As a result, it’s natural for us to start to search for catalysts that could spur the next turnaround for stocks. And considering the consumer accounts for roughly two-thirds of domestic economic output, one would expect a change in household sentiment to be a sign of a turnaround. But based on recent numbers from the University of Michigan, that’s unlikely to be the case. Because, the makeup of its economic expectations index indicates it will be some time before sentiment turns.

That means the S&P 500 Index will need a different catalyst like a trade deal or dovish Federal Reserve policy for the next leg of the rally. ?

But don’t take my word for it, let’s look at what the data’s telling us…

The University of Michigan has been tracking consumer sentiment since 1946. Its founder, George Katona stressed the importance of gauging household decisions on spending and savings to better gauge the direction of the domestic economy. Given it’s long history, the U.S. Bureau of Economic Analysis uses the numbers as part of its Leading Economic Indicators.

Each month the University conducts over 600 interviews, asking participants about a multitude of questions. Those include expected changes in inflation, unemployment, interest rates, and confidence, among others. In addition, respondents are asked to elaborate on the reasons for their answers.

I want to look at the broader consumer expectations answers. It focuses on three main areas: consumers’ view of their own financial situation, near-term prospects for the general economy, and their long-term economic opinion. prospects for the economy over the long term. So, it gives us an idea of how households are thinking about economic potential in the months ahead.

But there’s an added detail to the Michigan numbers that make them even more intriguing. The consumer expectations responses are broken down by political parties. That way, we can get a sense of political bias in the results. The data has been tracked since 2006, but the numbers weren’t consistent until 2015. Look at the historical results…

In the above chart, the blue line represents the responses from Democrats while the red indicates the same from Republicans. As you can see, prior to 2015, the numbers were relatively stable. But then, in late 2016, everything starts to change. The Democrats became more pessimistic on the economy while the Republicans grew optimistic. That was due to the election of Trump to his first term.

At the end of 2020, we see the next big shift. The Democrats optimism about the economy surges while the Republican mood sours. ?That’s due to the election of President Joe Biden. And like Trump’s term prior, the gap between the two remained the same until late last year.

Now, if we look at the far end of the chart, we notice another big shift. Republicans are once more optimistic on the economy’s chances because their party controls the White House, while Democrats are pessimistic because their party isn’t. Yet, there’s a difference… the Republican outlook isn’t that much more positive as much as the Democratic sentiment is increasingly negative…

In the above chart, I subtracted the Republican readings from the Democratic results to gauge the difference. As you can see, during the last two presidential cycles, the results have been roughly the same. But it’s the far end of the chart where we notice the difference. Based on the February survey, the gap between Democratic and Republican economic sentiment hit the widest level in the survey’s record.

Like I said at the start, don’t look for a rebound in consumer economic expectations to turn the tide in the stock market. The weak results we discussed above came out in mid-February, when the tariff rhetoric from the White House was minimal. Since that time, they’ve only grown worse. So, the economic mood couldn’t have improved.

As a result, we’ll need a different catalyst for a market rebound in the near term. And the best chance of that will likely come from the White House seeking trade talks or the Federal Reserve striking a more dovish tone about economic support.

Five Stories Moving the Market:

Senate Majority Leader Chuck Schumer (D-NY) moved to take the threat of a government shutdown off the table, following a grueling intraparty fight in which lawmakers struggled with how best to resist President Trump’s fast-paced efforts to slim down federal agencies – WSJ. (Why you should care – a deal to avoid a shutdown should help to ease a near-term growth overhang)

Canadian ministers emerged from a lengthy, high-level meeting between Canada and the United States saying the discussion was constructive; Canadian officials said they discussed economic security and national security with U.S. Commerce Secretary Howard Lutnick, and that talks would continue – Reuters. (Why you should care – progress toward trade negotiations could help avoid a broader tariff escalation)

Canada’s top ministers said the country’s change of leadership may provide a chance to “reset” it’s now troubled relationship with the U.S., its biggest trading partner; Mark Carney, who will replace Canadian Prime Minister Justin Trudeau, is expected to talk to President Donald Trump in the coming days, according to Canada’s industry and finance ministers as well as the ambassador to the U.S. – Bloomberg. (Why you should care – the officials expressed optimism about a better relationship between Trump and Carney)

Europe had been banking on a United States that wanted to make a deal on tariffs and trade; with little progress in that direction, it’s reluctantly starting to hit back – NY Times. (Why you should care – European Union officials are still seeking to start trade talks with the U.S.)

Elon Musk’s electric-car maker Tesla has warned that President Donald Trump’s trade war could make it a target for retaliatory tariffs against the U.S. and increase the cost of making vehicles in America; in an unsigned letter addressed to US trade representative Jamieson Greer, Tesla said that it “supports” fair trade but warned that US exporters were “exposed to disproportionate impacts when other countries respond to US trade actions” – FT. (Why you should care – the letter could potentially cause the White House to rethink some of its bellicose tariff rhetoric)

Economic Calendar:

China – New Yuan Loans for February

U.K. – GDP for January (3 a.m.)

U.K. – Bank of England Inflation Expectations (4:30 a.m.)

U.S. – University of Michigan Inflation Expectations (Preliminary) for March (10 a.m.)

U.S. - Baker Hughes Rig Count (1 p.m.)

U.S. - CFTC’s Commitment of Traders Report (3:30 p.m.)

Fed Releases Balance Sheet Updates on Commercial Banks (4:15 p.m.)

U.S. Government Funding Legislation Set to Expire (11:59 p.m.)