Why do consumer sentiment echo crash?

Whenever the economy goes into recession, something strange happens: consumer sentiment takes a jolt, recovers, and then crashes a second time, next to the recession.

I suspect that this feeling has something to do with the lagging nature of the survey: perhaps it’s the resentment of recovery or the resentment of disbelief.1

This is the fourth such crash in Reading Sentiment after recovering from a recession in recent decades. The chart above shows the University of Michigan Consumer Sentiment Index going back to the 1970s. Starting in the 90s, there has been a strange “echo crash” Later Every recession. I am not aware of any theory that explains why this feeling occurs; Maybe it’s the economic equivalent of PTSD, or maybe it reflects frustration over how the economic recovery is going. Regardless, each recession was followed by a significant drop in sentiment after recovery.

Consider the sentiment surrounding the 1990 recession: After falling from a high of 97.9 in 1989, sentiment crashed into a high of 63.9 in December 1990. By March 1991, it had recovered to 87.7 before collapse. Again 67.5 in January 1992.

Anyone who took the fall of sentiment in 1992 as a signal of market selling has left a lot of money on the table.

Similarly, before the 2001 recession, Michigan’s sentiment rating peaked at 112.2 in January 2000. It fell to a low of 82.7 in October 2001 (after 9/11) before recovering to 96.9 in May 2002. Echo was less than 2003.2 At 77.6.

The market has doubled in the next 5 years.

Sentiment of 96.9 was highest in January 2007 before the Great Financial Crisis (GFC) recession; Sentiment crashed to a low of 55.3 in November 2008, then reached 77.5 in February 2011 and before crashing sharply to 77.8 in August 2011 – almost identical to GFC Low.

If you sell based on low sentiment, you will miss a huge rally and the opportunity to triple your money in the S&P 500.

What about current feeling peaks and crashes? The pre-epidemic maximum sensitivity lesson in February 2020 was 101.0; They later came down to 71.8 in April 2020. Things are available here Strange kind: After recovering from April 2021 to 88.3, ​​they subsequently dropped to the lowest level of the epidemic at the GFC level of 58.4 in May 2022.

The epidemic recession and recovery have made everything abnormal; This is not a general expansion after the recession. Lots of cross currents and oddities have created a challenge in the analysis of this economy using traditional models and rules.

I’m not suggesting that we ignore the feeling – Phil Gram’s “mental depression” in 2008 showed us the dangers of that approach. However, recent sentiment data seems to be strangely conflicting with employment and wage data. James McIntosh noted that this seems to be out of sync with reality, with a WSJ headline “Consumers say 2022 is the worst economy ever:”

“Since the University of Michigan began its long-running Consumer Sentiment Index in the 1950’s, families have been suffering the most. বিবে Conscience Test: Really? Worse than when unemployment was nearly double current levels in 1980 and inflation was in double digits with 14.5% interest rate? Worse than after the 9/11 attacks or in 2008 when the global banking system was on the brink of failure?

Excess indicates that factors other than economics have a role to play: There is some data that shows that some of these are biased – the people’s assessment is based on their political affiliation and which party is in power. But the big wildcard is probably inflation: it started to rise aggressively in January 2021 and after 2 quarters around July 2021, sentiment rolled over.

There is no doubt that inflation is a major factor in the fall of 2021-22. But it may deepen the crash of this feeling, but does not explain the echo; I am intrigued by the notion that after a recession, there are long-lasting resonances of sensitive issues that lead to the collapse of that second feeling.

The psychology of surveys is that people are imperfect measure of what they imagine or predict what they are going to do. From holiday shopping surveys to pollsters to market sentiment, everything has been a problem. Whatever the case, we should never ignore the fall in emotion.

I can’t help but wonder if this pattern of breaking echoes in feeling after a big recession is something valuable. Not only is it a reminder that sentiment is a backward indicator, but it also suggests a reverse way of looking at the market.

Previously:
Sentiment LOL (May 17, 2022)

Many Bears (May 3, 2022)

Unilateral Market (September 29, 2021)

#Failed on Black Friday

See more:
Consumers say 2022 is the worst economy
By James McIntosh
WSJ, July 6, 2022

_________

1. Feelings are inherently backward, but questions of expectation are flawed for different reasons: people are afraid to predict the future, what they will do (shop, vote, etc.) or how they will feel. But it does provide a snapshot of the mood.

2. The U.S. invasion of Iraq began in March 2003 and is probably a significant source of negative sentiment.

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