What Does Stalled Consumer Sentiment Mean for Stocks?

Although consumer balance sheets have become a little bit stronger since the financial crisis, consumer confidence continues to remain low despite the performance of the stock market.

Consumer sentiment indexes have waned in the wake of the upcoming Presidential election and global economic turmoil and have not grown materially in the past two years, with no reversal of this trend in sight. It may take major changes in the economy before consumers feel optimistic again.

A Large Gap

When Goldman Sachs did its quarterly review of earnings calls, one of the key factors that it discovered was that there is a substantial gap between consumers’ financial condition and their sentiment. David Kostin, Goldman’s chief U.S. equity strategist wrote in a note to Goldman’s clients that, “Consumers are strong financially, but sentiment is mixed. Managements expressed concern that consumers will postpone spending due to rising political and economic uncertainty. However, financial firms noted an improvement in household balance sheets.”

Some examples of this can be seen in a few of Goldman’s earnings calls. Blackrock, Inc. said that many of its clients are unsure of where to put their money. The call contained the following quote: “Clients do not know what to do with their money. They are afraid and they are pulling back as evidenced by more than $55 trillion in bank deposits sitting in the United States, China and Japan alone. And even as markets have rallied recently, many clients have missed that upside and find themselves feeling even further behind.”

Starbucks Corp. executives also chimed in on several issues that have led to the low level of consumer sentiment. They said in their earnings call that the uncertainty of the Presidential election and domestic unrest over racial matters as well as concerns about terrorism have combined to cast a pall over consumer sentiment. They said that multiple factors were at work to create this condition and it is affecting every major company and consumer brand in the marketplace.

McDonald’s Corp. executives echoed many of the factors that Starbucks listed, saying that the level of uncertainty among consumers is higher than usual right now, and that they are struggling with assessing their own financial security at the moment and are paying attention to all of the unrest and turmoil both globally and domestically. And when consumers feel this type of uncertainty, then they tend to spend less and keep more money in their pockets.

Visa Inc. CEO Charlie Sharp took a brighter view of the situation. He has been impressed with the resiliency displayed by consumers. “The consumer has remained remarkably steadfast in the face of significant global instability,” he said.

The Bottom Line

Time will tell how consumer sentiment behaves in the coming months. Sentiment will likely remain low until at least after the election, when the direction that our country will take becomes clearer. The gains in the markets have done little to boost this sentiment, as many experts are now warning that stocks are becoming overvalued and may be heading for a serious correction.

The growing gap between corporate earnings and stock prices is also helping to fuel speculation of a market correction, and many consumers feel that they have lost out because they got out of the market after the last correction and have missed the subsequent gains that have been posted in the last few months. If the markets do correct, then consumer sentiment may start to rise again with the markets when they trade at a lower level. But for now, consumers remain cautious about how they spend their money and who they put their trust in.

Source: Investopedia


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