Misery may love company, but this is getting ridiculous.
If all you had to ponder were the numbers, you would assume that everyone would have fond memories of 2021. Jobs were plentiful. Economic growth was the strongest it had been in decades, and stock returns were out of this world. It’s the kind of data that would have been celebrated just a few years ago.
Despite the New Year, Americans aren’t celebrating—they’re mostly miserable. The University of Michigan Index of Consumer Sentiment dropped 13%, to 70.6, in 2021, the lowest end-of year reading since 2008, when the world was in the throes of the global financial crisis. Unlike that year, when the
S&P 500 index
dropped 38%, the index is up by more than 27%. That’s the largest stock market gain in a year when sentiment suffered a double-digit drop in at least 25 years. It’s the kind of agony expected from a bunch of teenagers at a Cure concert, but it’s hard to blame people for their gloom.
Covid-19 was supposed to be long gone by this point, or at least that’s what we’d hoped as 2021 got under way. But a combination of vaccine reluctance, virus mutations, and other factors has meant that not only is the virus still with us, but also that the U.S. is ending the year with a record number of cases—a seven-day average of 277,741, according to the Centers for Disease Control and Prevention data—and little sign that the Omicron spike will let up anytime soon. That the disease appears to have become less deadly as it has mutated is easy to overlook, though it shouldn’t be.
“The outlook for Omicron remains the same, as cases continue to break records globally, but the lack of [a] sharp increase in hospitalizations is allowing stocks to rally into year end,” writes the Sevens Report’s Tom Essaye.
Surging inflation has also been weighing on Americans. The Federal Reserve, after all, promised that rising prices would be “transitory,” and yet here we are at the end of the year with the consumer price index climbing at its fastest annual rate since 1982, and even Fed Chairman Jerome Powell has said it’s time to retire the word.
In the latest University of Michigan report, a fourth of respondents cited a hit to their living standards due to inflation. “The hope of a brief and fleeting spurt in prices has been dashed,” writes Stephen Stanley, chief economist at Amherst Pierpont Securities. “Inflation pressures have broadened behind the handful of pandemic reopening categories and intensified.”
Still, it’s rare to see such a disconnect between sentiment and the stock market. Since 1997, there have been 12 years of declining sentiment, with the S&P 500 finishing higher during seven of them. The decline in confidence during those years, however, was usually relatively small. The only year previous to 2020 when confidence suffered a double-digit decline and the market rose was in 2007, when a recession had already started, but the S&P 500 finished up 3%. Never has sentiment suffered double-digit declines for two years in a row only to see the S&P 500 rise by double digits in both years.
That suggests that perhaps there’s a growing divide between what respondents say and what they do. Retail sales increased by 18.2% in November, year over year, while the most recent quits data from the Department of Labor was 2.8%, down from a record 3%, but still elevated. Even inflation might not be the problem that it appears to be, observes Nicholas Colas, co-founder of DataTrek Research. Google searches for words like “discount,” “cheap,” and “coupon” are declining, not rising. “[As] much as U.S. consumers may think about inflation (and numerous surveys show they clearly do), they are not yet responding to higher prices by seeking out better deals,” he writes. “This is good news for U.S. corporate earnings power, especially among larger companies that also enjoy economies of scale and scope.”
Maybe so, but investors aren’t feeling very good about the stock market either, despite—or because of—three consecutive years of double-digit gains. The latest American Association of Individual Investors sentiment survey shows that the percentage of bulls remained below 45% for a fifth straight week, despite the S&P 500 trading above its rising 50-day moving average, observes Sundial Capital Research’s Jason Goepfert. When that has happened in the past, the S&P 500 has gone on to average a 4.6% gain over the next three months.
But just as consumers’ pessimism isn’t necessarily reflected in their actions, investors seem to be buying stocks despite a gloomy outlook—and that should be good news for the market. “The current low optimism, given a mostly healthy market environment, especially during this time of year, suggests higher prices,” he writes.
Just don’t expect it to be easy.
The Fed, after all, is cutting back its bond purchases, and the federal-fund futures market is pricing in a greater than 50% chance of a rate hike at the March meeting of the Federal Open Market Committee. That’s likely to inject a dose of volatility into the market. But with interest rates likely to remain below both the rate of inflation and the rate of economic growth, stocks should still be the place to be, writes Jefferies strategist Sean Darby, as long as the cost of credit relative to U.S. Treasuries doesn’t get too expensive.
“[Nominal] GDP will still be above government bond yields, ensuring equities outperform their peers, but a watchful eye on credit spreads will be the litmus test for owning the more challenging business models,” he explains.
And if the market doesn’t keep going up? At least investors will have something to be miserable about.
Write to Ben Levisohn at Ben.Levisohn@barrons.com