Probably the question I get asked most of late is “what’s up with the stock market?” Normally people want to know when the market will stop falling, but with 40 million Americans unemployed due to the pandemic, they don’t get why market indices continue to climb in the face of truly horrible economic news.
The chart below says it all. Over the past 40 years, we have never seen a greater percentage spread between the return of the S&P 500 and consumer sentiment. In other words, if consumer sentiment is so bad, why is the market so positive?
The market’s “V” like recovery is in part due to the perception that positive sentiment is increasing (+2.6% from April but still down -26.3% year over year). Consumer confidence will increase as the economy begins to reopen, however, there is a distinction between how consumers feel and how they act.
Due to massive government stimulus programs which either forbid layoffs, or requires rehiring workers, many consumers are being temporarily spared economic pain. These programs will sunset later this year, and then the moment of truth arrives.
Will consumer sentiment translate into spending? Will consumers continue to spend at the same levels as they did in the past, or will home confinement have changed consumer behavior for good? How many furloughed positions will translate into permanent job losses? To be clear, these questions are unanswerable at this time. The market is betting on a quick recovery and a bottoming economy.
Time will tell whether the market is right in calling this recovery. It seems to this observer that with unemployment projected to be in double digits for perhaps the next year or two, it may be tough for consumers to act on their desire to go back to the way it was.
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