Consumer Sentiment and the Stock Market
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This discussion is with Vector advisor and COO Jason Ranallo.
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Summary
When people feel the worst about the economy, that’s often when markets perform their best. Strange, right? But this is one of the fascinating dynamics we see when we dig into consumer sentiment—a gauge of how people feel about the economy.
The March preliminary Consumer Sentiment Index slumped 7 points to a lower-than-expected reading of 57.9. This was the third consecutive decline, bringing sentiment to its lowest level since 2022. The sharp deterioration is historically consistent with a slowdown in economic growth, as consumers typically pull back on spending.
Historically, when consumer sentiment is at its lowest, the stock market tends to rally—often strongly—over the next 12 months. In fact, the average return for the stock market following sentiment troughs is just over 24%, compared to just 3.5% after sentiment peaks.
Why this disconnect?
While current concerns about inflation, layoffs, and geo-politics are valid, financial markets are forward-looking. Markets are not only reacting to today’s emotions—they’re also trying to price in tomorrow’s outcomes. Periods of extreme pessimism can signal opportunity for long-term investors.
In this video podcast, we explore how sentiment acts as a contrarian indicator and how investors can respond. Rather than predicting the bottom, we emphasize having a plan, a diversified investment approach, and the ability to take action.
Take aways:
Consumer sentiment can be a contrarian indicator
Markets are forward-looking.
Intra-year market declines have averaged -14% (yet finished positive a favorable 75% of the time)
Worth noting past performance is no guarantee of future results. We zoom out for context and understanding.
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Transcript
(adapted for readability)
When people feel the worst about the economy… that’s often when markets perform their best. Strange, right? But this is one of the fascinating dynamics we see when we dig into consumer sentiment—a gauge of how people feel about the economy.
In March, the preliminary Consumer Sentiment Index slumped 7 points to a lower-than-expected reading of 57.9. This marks the third consecutive decline, bringing sentiment to its lowest level since 2022. Historically, this kind of sharp deterioration is consistent with a slowdown in economic growth, as consumers tend to pull back on spending.
Consumers, broadly speaking, are expecting conditions to worsen in the months ahead—across personal finances, labor markets, inflation, business conditions, and even the stock market. What’s more striking is that the pessimism is widespread, cutting across political affiliations.
So let’s zoom out and look at the historical data. When consumer sentiment hits a low point, the stock market tends to rally—often strongly—over the next 12 months. The average return for the stock market following past sentiment troughs is just over 24%, compared to only 3.5% after sentiment peaks. Now, to be clear, we’re not saying this is a definitive bottom or that markets will perform strongly in the year ahead. The key observation is that, historically, these low-sentiment environments have often been good times to own stocks.
So why the disconnect between how people feel and how the market behaves? A big part of it is emotional. People respond to what’s directly in front of them—layoffs, rising costs, geopolitical tensions, technological disruption from AI or automation, and so on. These are valid concerns, and they weigh heavily on sentiment. But markets don’t trade on today’s headlines. They’re pricing in expectations for the future.
At this point, you might be wondering—are we at a bottom for sentiment or for the markets? Truthfully, we don’t know. Predicting how people will feel months from now is as difficult as predicting exactly where the market will be next month or next quarter. That’s why our focus is on what we can control: having a plan, owning a diversified portfolio, and being prepared to act when opportunities arise.
Let’s put this into context. As of this recording, the U.S. stock market is about 7% off its highs from February. But when we look back over the past 45 years, the average intra-year decline has been 14%—yet the market still finished the year positive 75% of the time. That pattern also holds true over a 100-year span. Markets go through corrections and recoveries, and long-term investors are rewarded not by avoiding short-term dips, but by staying the course through them.
So here are the takeaways: consumer sentiment can act as a contrarian indicator. When confidence hits the floor, the market may already be laying the foundation for a rebound. Declines are part of the normal rhythm of investing, and despite the reasons behind each one being different, the market has historically come out stronger. That’s why having a plan, staying diversified, and being ready to take action are essential tools for long-term investors.
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Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.
Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for any individual. Listeners are encouraged to seek advice from a qualified tax, legal, or investment adviser to determine whether any information presented may be suitable for their specific situation.
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