Consumer Sentiment - Highest Since March

Consumer Sentiment Strong

The University of Michigan consumer sentiment report showed consumer sentiment was 100.8 in the preliminary September reading.

This beat the average estimate for 97 and last month’s reading of 96.2. It also beat the highest estimate which was 99. This report showed the most optimism since March 2018. Other than that, this was the most optimism since 2004.

Specifically, the current conditions index increased almost 6 points to 116.1. In theory, this indicates consumer spending will be strong, but that’s far from a guarantee.

As you can see from the FRED chart below, consumer opinion surveys were correlated with real personal consumption growth up until the past few years.

Q1 had weak real consumption growth and Q2 had strong real consumption growth. Hurricane Florence could cause a spike in auto buying in September or October which would boost consumer spending in Q3 or Q4.

Some parts of North Carolina are still dealing with flooding; the last thing many victims are thinking of is buying a new car.

As I discussed in a previous article, retail sales in August were weak on a month over month basis. They were strong on a year over year basis, with particular strength in restaurant and online sales.

Consumer Sentiment - Expectations in the consumer sentiment report increased 4 points to 91.1.

Much has been made about how the current conditions index is higher than the expectations index because it’s supposed to be a bad sign. However, there’s not much more you can ask of the expectations index as it hit a 15 year high.

Tariffs were mentioned by 1/3rd of respondents instead of 1/5th like in the prior months. Obviously, the tariffs haven’t done much because consumers are very optimistic even about the future.

The fear of tariffs hasn’t equated to a changing outlook. Many consumers probably aren’t aware of the ramifications of a trade war because they haven’t lived through one.

Consumer Sentiment - Inflation Expectations Fall

Inflation expectations fell 0.2% for next year and for the next 5 years, putting them at 2.8% and 2.4% respectively.

These expectations match the PPI and CPI reports. The PCE inflation reading comes out next Friday. Regardless of the inflation readings or the survey reading of what consumers think of inflation, the Fed is powering ahead with rate hikes. It fears wage inflation.

The Fed is expected to hike rates 2 more times in 2018. Personally, I would maximize real wage growth if I controlled rates.

If wages are the main aspect driving inflation, real wage growth will be positive. However, it’s also worth considering the fact that tariffs could cause inflation to spike.

That changes everything as the Fed might be forced to hike rates further to prevent inflation. It’s tough because if a trade deal is struck and the tariffs are eliminated, then the Fed is left out to dry on rate hikes.

It might need to cut rates in this hypothetical scenario. You can see, consumers aren’t including potential tariffs in their inflation estimates.

Consumer Sentiment - Americans Completely Lost On Stocks

The chart below is shocking. Americans were asked how they think stocks have performed since December 2008. 48% said stocks are at the same price or lower than they were in 2008.

That’s probably because about half of Americans don’t own stock. These people probably only remember the negative event that was the 2008 crisis and don’t realize stocks have rallied since then.

Positive events aren’t as dramatic as negative ones. People equate the strong labor market and improving real incomes with a sense of normalcy. In many ways it is a great time to be alive in terms of economic performance.

However, those who don’t follow the stock market don’t comprehend how that equates to equity performance.

As you can see, only 19% think stocks increased over 100%. These respondents don’t understand compound annual returns, if stocks went up 100% in that period, the returns per year would have been about 7.25%.

Consumer Sentiment - That’s relatively weak for coming off the worst bear market in decades. 

Only 8% were correct when they stated the market was up over 200%.

This should make you feel good managing your money because you are more aware of the historical performance of stocks. It’s a big mistake to think stocks have fallen or done nothing because then you wouldn’t want to invest now.

While I’m bearish on the short term and not optimistic about returns in the next few years, the stock market is a great place to put your savings if you have a long term time horizon.

Even if you aren’t investing money yourself, you should still know what your performance is to potentially change managers if you are underperforming and to plan for retirement and other big expenses. Y

ou could actually save too much money for retirement (not a common problem) if you don’t account for the great compound returns stocks should provide.

Consumer Sentiment - Misnomer About The FANG Names

While only uniformed people would think stocks aren’t up since December 2008, even informed investors think the market needs the top momentum names to drive it higher.

However, even though the stock market is near a record high, the FANG stocks have mostly underperformed. Quarter to date, Amazon stock is the 95th best performer in the S&P 500. Alphabet is in 287th place, Netflix is in 447th place, and Facebook is in 490th place.

In the long term, my favorites are Amazon and Alphabet. I only dislike Netflix because of its operational leverage. A few bad shows could cause the company to cascade lower.

Consumer Sentiment - Conclusion

The consumer is optimistic, but that far from guarantees consumption growth will be strong in Q3. Americans widely underestimate the returns of this bull market.

The bull market doesn’t need the FANG names to do well for it to keep increasing.

Low inflation expectations for the next year and 5 years isn’t going to stop the Fed from raising rates 2 more times in 2018 and potentially multiple times in 2019.

 

 

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