Consumers are showing signs of increased positivity despite concerns about inflation and borrowing costs. A recent consumer sentiment report surprised analysts when the index rose 27 percent from a year ago. The caveat is that June 2022 (last year) marked an all-time low in sentiment since the University of Michigan started tracking vibes in the 1950's.

We explore what sentiment has meant for markets, shelter as a component of CPI, and changes in mortgage rates.

Sentiment can be a contrarian indicator, meaning that when it's low, stock markets tend to perform well one year later. We're seeing the market recover, even if the breadth is still relatively narrow. Consumer discretionary stocks (think: shoes, trucks, and airline travel) seem to anticipate a continuation of confidence.

The shelter component of CPI is more than a third of the index's weight. Even with higher borrowing costs, which alone would decrease home sale prices, available home inventory is at historic lows keeping home prices inflated in several regions.

Builders are responding to demand by starting more new home projects. However, we expect a lag before these efforts show up in CPI, which measures owners' equivalent rent rather than home sales.

In the housing market, mortgage rates for a 30-year fixed loan are around 6.67% today, compared to 5.81% one year ago. These increased rates affect the average monthly payment for home buyers, up approximately 10% compared to a year ago.

During periods of higher interest rates, sticky inflation, and below-average consumer sentiment, we believe it is important to remain present in markets with a long-term view.

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