I was chatting with my friend Pete Dominic last week, and he asked about consumer sentiment. I’ve come up with a few reasons why I suspect it’s been so negative:
1. Over the last ~20 years there has been a great deal of spread from partisan belief to sentiment;
2. This is particularly evident in changes in party control of the White House;
3. Members of both major parties do this, but it is more intense among those who identify as “right-leaning.”
There was some pushback on this, especially #3. Lucky for me that Matt Winkler did the heavy lifting on this issue yesterday: “Blame the election deniers for ruining consumer sentiment.” He saved me from diving down that particular rabbit hole, observing:
“Nearly 70% of Republicans mistakenly believe that Joe Biden lost the 2020 presidential election when he won by more than 7 million votes, which, not surprisingly, has similarly contributed to his low approval ratings against the 46th president.
Never mind that Covid-19-related deaths fell 78% from the first quarter to the second, that 10 million new jobs were created, that unemployment at 3.5% represents a 53-year low, that corporate earnings rose to a record, and that CEO confidence remains above its long-term average. . Not to mention that total household wealth will increase by $18.1 trillion in 2021, the most under any president, while Congress passes the largest infrastructure bill in 2022 and the first gun safety legislation in 30 years.”
Have a different conversation about how terrible Democrats are at messaging (that’s beyond my expertise). Even with inflation at a 40-year high, it should be contextualized within the framework of the rest of our economy — jobs, wages, etc.
It’s surprising that today’s sentiment is worse than the levels seen between the worst modern financial crisis and epic generational market crashes. Winkler’s point is that this level of negativity makes little sense Economically But more consistent with partisanship (see chart at top). Generally speaking, I think sentiment data can only be useful when it’s extreme. This current spillover potentially makes even those readings less useful.
Before we go any further, a Phil Gramm warning: Ignore widespread consumer discontent at your own peril. Recall that on July 10, 2008, then-Senator Gramm told a bunch of whiners to Americans. Literally:
“You’ve heard of depression; It is a mental breakdown. We may be in a recession; We haven’t had one yet. We have somehow become a nation of whiners. You just hear this constant whining, complaining about the rate of competition, that America is going down…”
the eyes . . The recession is already in its 8th month, in December 2007; The housing was rolled two years ago; Mortgages were already resetting higher and defaulting in greater numbers. Gramm’s blithe dismissal of negative sentiment is a cautionary tale that reminds us to tread lightly when dismissing pervasive negativity.
Still, Winkler makes a compelling and data-driven case that current sentiment levels are more disconnected from the overall state of the economy than historical levels. Whereas Gramm was representing his group’s views, Winkler questioned the influence of bias in reading consumer sentiment.
Consider this annotated chart from the University of Michigan Sentiment Index going back to 1978:
Does this mean that current sentiment readings are worse than:
1. 1980-82 Double Dip Recession
2. 1987 Crash
3. 1990 Recession
4. 9/11 terrorist attacks
5. The 2000-2003 dotcom implosion
6. 2007-09 Great Financial Crisis
7. 2020 Pandemic Panic
“Bilateralism is woefully absent in readings of consumer sentiment,” Winkler said. Considering all of the events I mentioned were much worse than the current state of the economy and the overall market, I’d have to agree.
I have long spoken of the dangers of mixing politics with investment; We have to consider the real possibility that participants in the Consumer Sentiment Index are ignoring that advice.
in the past:
Trouble with consumer sentiment (July 8, 2022)
Sentiment LOL (May 17, 2022)
Too Many Bears (May 3, 2022)
Overwhelmingly Negative Results (April 11, 2022)
What News Looks Like When It’s Old (October 29, 2021)
Politics and Investments
Blame the election deniers for ruining consumer sentiment
By Matthew A. Winkler
Bloomberg, August 8, 2022