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.
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
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.
You cannot directly invest in an index.
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.