Consumer sentiment and forward market performance

Putnam Capital Market Strategies team, 09/07/22


Introduction

In light of decades-high inflation, the Federal Reserve tightening monetary policy, and concerns about an economic slowdown, U.S. consumer sentiment has plummeted.. This year, sentiment is historically low, according to the University of Michigan Survey of Consumers.

In this analysis, we look at the relationship between the highs and lows in consumer sentiment, and forward equity performance.

Background

The University of Michigan conducts a monthly survey of U.S. consumers. The index of consumer sentiment measures attitudes toward personal finances, general business conditions, and market conditions, or prices.

Consumer sentiment and forward performance

The July index reading of 51.5 was up slightly from June’s reading of 50. These are the lowest readings on record for the index.

Exhibit 1 looks at troughs in consumer sentiment and the forward performance of the S&P 500 Index.

Historically, market returns after troughs in consumer sentiment have been well above average. The average 6-month return is 14.7% and the 12-month return is 25.2%.

Market returns after peaks in consumer sentiment have been closer to historical averages. The average 6-month return is 4.9% after consumer sentiment peaks, and the 12-month return is 6.3%.   Exhibit 1: University of Michigan Consumer Sentiment Index and S&P 500 Index returns Sources: University of Michigan, Bloomberg

Conclusion

Looking at the past 40 years of data, we can see that historically, the forward returns from troughs in consumer sentiment are much higher than the forward returns from peaks in consumer sentiment. The average S&P 500 returns 12 months after troughs in sentiment are 25.2% in the sample. The average returns 12 months after peaks in consumer sentiment are 6.3%.

The S&P 500® Index is an unmanaged index of common stock performance.

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