A Summertime Thawing of Sentiment?

The latest batch of sentiment surveys provide some evidence the dire pessimism prevalent last year is easing. In our view, these polls aren’t perfect, but they do offer one way to see nascent warming. Some pessimism remains and scepticism abounds, according to our observations, but it seems thawing is starting to happen—as we think typifies a young bull market (prolonged period of broadly rising stocks).^[i]

We will start in America, where the University of Michigan’s (U-Mich) widely watched Index of Consumer Sentiment registered 72.6 in July from June’s 64.4—its second-straight monthly climb and well ahead of consensus estimates of 65.5.^[ii] July’s was the highest reading since September 2021—a year and a half after early-2020’s bear market ended—and the largest monthly advance since 2006.^[iii] (A bear market is a long downturn of -20% or worse with a fundamental cause.) All underlying components improved, led by a jump in long-term business conditions, as the survey credited the rise to the ongoing slowdown in inflation (broadly rising prices across the economy) and a resilient labour market.^[iv]

Now, we don’t think this means US consumers are feeling super chipper. July’s preliminary estimate is still well off February 2020’s prepandemic level, and moods remain down relative to the past 20 years. (Exhibit 1)

Exhibit 1: U-Mich’s Consumer Sentiment Index Since 2000

Source: FactSet, as of 14/7/2023. Recession (a broad economic contraction) dating based on America’s National Bureau of Economic Research’s (NBER) Business Cycle dating. NBER is the official arbiter of US recessions.

But things seem to be stabilising—even across political party lines. Survey respondents identifying as Republican have been more dour about the economy than those who identify as Democratic since November 2020, when the White House flipped from Republican Donald Trump to Democrat Joe Biden. (Exhibit 2) That isn’t a surprise to us, as our research has found that people tend to feel more optimistic when their preferred political party is in power—and worse when their party is the opposition. That said, both groups reported an uptick in moods in July, which we think is partially attributable to Americans’ noticing cooling prices.

Exhibit 2: Some Improvement in Americans’ Moods, Regardless of Party

Source: University of Michigan, as of 14/7/2023. January 2020 – July 2023.

Some other prominent polls we follow echoed U-Mich’s findings. For example, the US National Federation of Independent Business’s (NFIB) Small Business Optimism Index climbed to a seven-month high in June on some improvement in the economic outlook.^[v] Still, the poll also noted persistent inflation worries, and moods remain historically low: June was the 18^th straight month the NFIB index was below its 49-year average.^[vi] In the Land Down Under, Australia’s Westpac Consumer Sentiment Index ticked higher in June as slowing May inflation seemed to boost confidence.^[vii] But as in America, Aussie sentiment remains mired in a deep pessimism that has persisted for over a year.^[viii]

Poor moods are even more prevalent in Europe, based on our analysis. Research outfit sentix shared bleak expectations in the eurozone, as its economic index fell a third straight month in July to its lowest level since November last year, when energy security fears dominated.^[ix] Sentix attributed the decline to “recessionary circumstances” and few signs of economic improvement ahead—and explicitly called the situation in Germany “dramatically bad.”^[x] The ZEW institute reported a similar finding, noting a fall in German investor confidence in July—its gauge of expectations dipped to -14.7 from June’s -8.5—due to rising global interest rates and weak export demand from China (with the latter knocking Germany’s industrial sector).^[xi]

In our view, these findings provide a snapshot of where moods are today. Yes, outside Europe, sentiment is improving relatively speaking. But in an absolute sense, we think broad-based optimism is distant. Moreover, it isn’t a shock to us that worsening economic data is making folks more pessimistic in Europe. But whilst poor numbers can ding sentiment in the short term, the latest data don’t reveal anything new to stocks, in our view, especially since economists have been discussing the prospect of a deep eurozone recession for more than a year now.^[xii] Based on our research, surprises move stock prices most, and eurozone economic weakness doesn’t fit the bill, in our view.

That goes for most of the concerns highlighted in the latest sentiment surveys, too. In our view, stocks have already digested issues like elevated inflation and moved on. We don’t deny economic conditions remain challenging globally. Nor do we dismiss the possibility of recession. But old, recycled negatives remaining atop headlines and people’s minds suggests to us the young bull market has plenty of the proverbial wall of worry to climb. As legendary investor Sir John Templeton put it, “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” We may be removed from that initial deep-seated pessimism, but it doesn’t mean we are out of it yet—a reason to be bullish, in our view.