Misery may like company, but this is getting ridiculous.
If all you had to think about were the numbers, you’d assume everyone would have fond memories of 2021. Jobs were plentiful. Economic growth was the strongest it had been in decades, and stock returns were out of this world. This is the kind of data that would have been celebrated just a few years ago.
Despite the New Year, Americans don’t party, most of them are miserable. The University of Michigan consumer sentiment index fell 13% to 70.6 in 2021, the lowest year-end result since 2008, when the world was in the grip of the global financial crisis . Unlike that year, when the
S&P 500 Index
fell 38%, the index is up more than 27%. It was the biggest stock market rally in a year when sentiment suffered a double-digit decline in at least 25 years. It’s the kind of agony you’d expect from a group of teenagers at a Cure concert, but it’s hard to blame people for their gloominess.
Covid-19 was supposed to be long gone by this point, or at least that’s what we were hoping for in early 2021. But a combination of vaccine reluctance, viral mutations and other factors has meant that not only the virus is still with us, but also that the United States ends the year with a record number of cases – a seven-day average of 277,741, according to data from the Centers for Disease Control and Prevention – and few signs that the Omicron peak will stop anytime soon. It’s easy to ignore that the disease appears to have become less deadly as it has mutated, although it shouldn’t be.
“The outlook for Omicron remains the same as cases continue to break records around the world, but the lack of [a] The strong increase in hospitalizations allows actions to recover at the end of the year, ”writes Tom Essaye of the Sevens Report.
Soaring inflation has also weighed on Americans. After all, the Federal Reserve has promised the price hike will be “transient,” and yet here we are at the end of the year with the Consumer Price Index climbing at its fastest annual rate since 1982, and even Fed Chairman Jerome Powell has said it’s time to withdraw the word.
In the latest report from the University of Michigan, a quarter of those polled cited a blow to their standard of living due to inflation. “The hope for a brief and fleeting price surge has been dashed,” writes Stephen Stanley, chief economist at Amherst Pierpont Securities. “Inflationary pressures have widened behind the handful of reopening pandemic categories and have intensified. “
Yet it is rare to see such a disconnect between feeling and
the stock market.
Since 1997, there have been 12 years of declining sentiment, with the S&P 500 ending higher for seven of them. The decline in confidence during these years, however, was generally relatively small. The only year before 2020 when confidence suffered a double-digit drop and the market rose was in 2007 when a recession had already started, but the S&P 500 ended up 3%. Sentiment has never taken double-digit declines for two consecutive years only to see the S&P 500 rise to double-digits in both years.
This suggests that there may be a growing gap between what respondents say and what they do. Retail sales rose 18.2% in November, year-over-year, while the most recent data on departures from the Ministry of Labor was 2.8%, from a record 3% , but still high. Even inflation may not be the problem it appears to be, observes Nicholas Colas, co-founder of DataTrek Research. Google searches for words like “discount”, “cheap” and “coupon” are down, not up. “[As] just as American consumers can think of inflation (and many surveys clearly show that they do), they still don’t react to higher prices by looking for better deals, ”he writes. “This is good news for the profit power of US companies, especially among large companies that also benefit from economies of scale and scope.”
Maybe, but investors don’t feel too good about the stock market either, despite or because of three consecutive years of double-digit gains. Latest American Association of Individual Investors Sentiment Survey Shows Bull Percentage Stays Below 45% for Fifth Week in a Row, Despite the S&P 500 Trading Above Its Rising 50-Day Moving Average , observes Jason Goepfert of Sundial Capital Research. When this has happened in the past, the S&P 500 recorded an average gain of 4.6% over the next three months.
But just as consumer pessimism isn’t necessarily reflected in their stocks, investors seem to be buying stocks despite the bleak outlook, and that should be good news for the market. “The current low optimism, given a generally healthy market environment, especially during this time of year, suggests higher prices,” he writes.
Don’t expect it to be easy.
The Fed, after all, is reducing its bond purchases, and the federal funds futures market is considering a greater than 50% chance of a rate hike at the March Federal Open Market Committee meeting. This is likely to inject a dose of volatility into the market. But with interest rates likely to remain below both the rate of inflation and the rate of economic growth, stocks should still be the place to be, writes Jefferies strategist Sean Darby, as long as the cost of credit compared to US Treasuries doesn’t get too expensive.
“[Nominal] GDP will always be higher than government bond yields, ensuring stocks outperform their peers, but a watchful eye on credit spreads will be the litmus test for owning the toughest business models, ”he explains.
What if the market does not continue to rise? At least investors will be very unhappy.
Write to Ben Levisohn at [email protected]