Digging Into the Disposition-Data Disconnect

What can we learn about investor sentiment from our pals across the pond? A recent Guardian poll of Americans’ views of the economy and stock market has been dominating headlines in financial publications we cover. According to it, one in two Americans think stocks are down this year—even though American stocks are up double-digits year to date in USD.^[i] Moreover, nearly three in five respondents think the US economy is presently in recession (a widespread economic contraction). 

In our view, this suggests there is a sizable disconnect between sentiment and reality, which we have seen feed a lot of similar articles pondering why—both in America and internationally. Many commentators we follow posit this gap between how people feel and what has happened is highly unusual. But dour moods that don’t reflect reality aren’t unique, and we don’t think this time is different. 

According to a Harris poll conducted 10 – 12 May  for The Guardian, Americans hold some major misperceptions about the US economy.^[ii] Notably, 55% think the economy is contracting and 56% believe the US is in recession, even though US gross domestic product (GDP, a government-produced measure of economic output) has grown on an annualised basis the past seven quarters.^[iii] Moreover, 49% said the US-orientated S&P 500 is down year to date (it is up double-digits in US dollars) whilst nearly half of those polled reckon the unemployment rate is at a 50-year high (it is near a 50-year low).^[iv]

Now, we don’t have the survey’s actual questions, so it is possible unclear phrasing confused some respondents.^[v] But in general, the survey’s findings aren’t far removed from reporting and common narratives elsewhere we have observed in America and Western Europe. We have seen some experts call the US economic environment a vibecession, which we find a revoltingly hip way to say the economy is fine per macroeconomic statistics, but people still feel it is doing badly. Some argue this will weigh on Americans’ spending or investment decisions, based on our coverage of the responses to the poll.

People saying they feel down is one thing. Understanding why is more difficult, though the news industry plays a big role in fostering a glum environment, in our view. Based on our observation and analysis, its incentive is (and has been historically) to get attention and entertain its target audience—and psychological research has long shown an effective way to do that is by appealing to emotion. As the late Nobel-prize winning economist and psychologist Daniel Kahneman and his colleague Amos Tversky demonstrated through their work, humans experience negative feelings more strongly than positive.^[vi] In practice, we think this means a reader is more likely to click on a story about a possible, easy-to-comprehend negative event than one reporting a mundane, complex reality.

After two years of nonstop talk of a looming US recession across financial publications we monitor, we have seen headlines continue to bombard readers with reasons to think things are going badly: hiring slowdowns and layoffs, tariffs, dwindling household savings, the sting of still-high prices (even if the rate of rising prices has cooled markedly) and more. We don’t find it surprising people think the broader economy is in dire straits, even if their personal financial situation isn’t as constrained.

Then there is politics. This is, after all, a presidential election year in the US, and many investors view the economy through a political lens in our experience, even though our research shows the federal government has far less influence over growth in America’s private-sector-dominated economy than many think.^[vii] We have seen many sentiment surveys suggest respondents’ economic or market views are coloured by whether the party they favour is in or out of power—a very dangerous bias for investors, in our view.

All this likely underlies the seeming disconnect between consumer sentiment and economic activity, in our view. Someone may think the majority of Americans are struggling financially because they have read or seen dour polls and anecdotes about struggling households and businesses. But we think that overlooks how a record number of retirement plan savers have a balance of over $1 million; the influx of airline travelers taking to the skies this past Memorial Day holiday; and that US businesses continue to add more jobs than subtract.^[viii] Whilst consumer prices haven’t fallen, wage growth has outstripped the pace of rising prices for a year, whether you use the overall average of private-sector workers or the Atlanta Federal Reserve’s gauge that tracks the same people over time.^[ix] A retired couple may think monetary policymakers’ decisions, war overseas and local businesses closing down mean the economy is troubled—but that doesn’t seem to stop many of them from treating their grandkids to a summertime holiday trip to their favourite amusement park.

People’s fretting the economy’s present and future whilst feeling ok about their own situation isn’t unique to 2024. Back in the 1980s, commentators at the time argued Japan was supposedly on its way to overtaking the US economy, leaving only McJobs—a grim future of low-paying, mundane work.^[x] That term was coined early in a boom that ran from 1982 through 1990’s shallow recession.^[xi]

We have seen many today look back at America’s subsequent 1990s economic expansion with rose-coloured glasses, but that joyous hue didn’t come until very late, according to our studies. Employment didn’t rebound strongly after growth returned, which some experts whose work we read called a jobless recovery.^[xii] Halfway into the expansion, commentators at the time acknowledged US economic data were strong, but they argued most workers weren’t reaping the gains (as evidenced by stagnant pay).^[xiii]

In the 2000s, China’s soaring economy seemingly meant US primacy was over in the opinion of many economists, and we read scores of thought pieces attributing America’s allegedly plodding prospects to factors like income inequality, which manifested in the Occupy Wall Street movement.^[xiv] Based on our coverage of financial headlines at the time, a lack of jobs early in the recovery again spurred jobless growth gripes and the proliferation of part-time work echoed McJobs concerns from a generation earlier as well as the stagnant wage growth worries in the 1990s. Yet those dour moods didn’t prevent the 2010s US economic expansion and history’s longest bull market.^[xv]

We don’t think the past is a perfect analogue to the present, nor does it reveal the future. But this not-too-distant history is worth keeping in mind for investors, especially since time softens memories, in our experience. We agree with the sentiment that the 1980s were great times for the US economy. But it wasn’t a perfect golden age, in our opinion, and we found people had their concerns about the state of things then—just as they do now. Ditto for the 1990s. And the 2000s. And so on.

So, yes, today isn’t perfect. But in our analysis of capital markets, stocks haven’t required perfection or persistently positive vibes (sorry) to rise. And whatever the vibe of the hour is, we think investors benefit from remembering that how folks report feeling may not at all reflect what they actually do—or what it means for the economy.