Based on the University of Michigan’s Consumer Sentiment Index, household confidence has collapsed in recent months. Other measures paint a less dire picture about consumer fears but most of them similarly suggest that enthusiasm has waned. Importantly, this decline in consumer confidence comes at a time of abnormally high consumer savings.
Since the pandemic, economic policy has become an obsession for most investors. The thickness of former Federal Reserve Chairman Alan Greenspan’s briefcase seems pedestrian today. When fiscal and monetary authorities began adopting highly unconventional methodologies after the 2008 financial crisis (e.g., Tarp, Cash for Clunkers, and QE), the mantra on Wall Street became WWPOD (What Will Policy Officials Do?).
In recent weeks, the news surrounding the stock market has turned much more challenging. Most economic reports have come in below expectations, taper-talk swirls about the Federal Reserve, and company earnings reports—while mostly still robust—no longer seem to boost stock prices. In addition, the U.S. exit from Afghanistan has been disturbing, supply shortages and inflation evidence are rampant, and, most importantly, the escalating spread of the Delta variant is dampening economic activities.
This year, investors, policy officials, and the financial media have been obsessed with when the Federal Reserve will finally start tapering its quantitative easing (QE) program. And perhaps more importantly, is it possible to curtail QE without triggering a temper tantrum in the stock and bond markets?
Last Friday, the University of Michigan reported its Consumer Sentiment Index suffered a shocking collapse. It fell by 11 points, which is the sixth-largest monthly decline since its inception in January 1998. Amazingly, as shown in Chart 1, it deteriorated to a weaker level than April 2020—right after the U.S.-onset of the COVID crisis that essentially shut down the entire economy. Moreover, the Sentiment Index now resides at one of its most pessimistic levels of the last 23 years. Only during the Great Financial Crisis was consumer sentiment shaken noticeably more than today.
Normally, volatility is feared. It’s a lesson learned early by investors. Experiences like the 1987 crash, the 2008-09 financial crisis, and the 2020 pandemic serve to educate investors. Strive for more return but only while being ever vigilant about risks (volatility). Move that risk/return profile as far as you can to the northwest investment quadrant!