The Great Recession economic collapse (2007 -2008) centered around variable sub-prime mortgages and challenged millions of homeowners' ability to keep their homes. The Recession was the longest and deepest decline of the US economy in decades, with the poverty rate rising from 12.5% to 15% and unemployment soaring to 10% by October 2009. The devastation was significant for households as the largest percentage of homeowners in US history experienced mortgage defaults and foreclosures.
During the Great Recession, it was not just homeowners that were traumatized. The US financial industry was at great risk that, included the unthinkable experience of seeing Lehman Brothers, a multi-billion dollar fourth largest centuries-old investment bank collapse. Millions of Americans watched as more than 25,000 employees were suddenly unemployed and escorted out of beautiful office towers around the world after 158 years in business.
General Motors and Chrysler both declared bankruptcy in 2009, which impacted 100,000's employees and required federal bailout funds to stave the same experience as Lehman Brothers. In September 2008, AIG, the former global dominant insurance company, was also facing bankruptcy that was saved by a $142 billion loan from the Federal Reserve in exchange for 79.9% of the company's equity. The equity years later provided a profit for the Federal Reserve of $22.7B as AIG fully recovered from its crisis.
During the Great Recession, consumer sentiment sunk to the lowest level in 2008 since the University of Michigan began reporting.
To slow the unraveling again of the US economy, the Federal Reserved in 2020 dropped the discount rate to 0%, and Federal and State government agencies handed out trillions of tax-free stimulus dollars to individuals and businesses. During the worst of the pandemic, consumer sentiment remained well above the low levels reached during the Great Recession.
Consumers seemed to have a delayed response to the pandemic in 2022, like PTSD, as sentiment plummeted to the new lowest level in recorded history. Almost two years after the start of the pandemic and well after nearly all US government restrictions on society and businesses were reversed, consumers went into a deep depression in 2022. Even the bounce back from last summer's low up to last month leaves the index well below levels in the past 22 years.
The possible explanation for the delayed reaction by consumers is the drying up of trillions of government stimulus and their personal investment and retirement accounts dropping in value as the stock market selloff was finally acknowledging the financial risks to companies. Ironically, the worldwide risks to mankind barely impacted US consumer sentiment until government subsidies ended and the stock market sold off.
It is impossible from looking at the chart above on Consumer Sentiment to determine when the economy was struggling or rallying. Even more, the bazaar is that consumers' sentiment doesn't impact their spending, and they never stopped spending during ANY crisis since the Great Depression.
Below is a chart from the US Bureau of Economic Analysis for the past 72 years on consumer spending. Except for the dip in spending in 2008 and again in 2020, consumers spent more every year despite their ill feelings.
This phenomenon provides some insight as to why our economy and stock market bounce back so quickly and always onto new record levels of growth. Consumer spending represents 66% of the US economy's Gross Domestic Spending (GDP). From this data, we conclude that tracking consumer sentiment does not provide direct insight into future consumer spending, the economy, and the stock market.
More applicable data is to track how much money consumers have and how much they spend. For the past several years, consumers and businesses received trillions in stimulus dollars, and then in 2021, wages increased dramatically due to a shortage in the labor market. Despite the economic and health challenges during 2020 and 2021, consumers had money to spend, and therefore the economy was stable.
The good news for 2023 is the US Bureau of Economic Analysis reported that household income increased by 3.2% in Q4 2022, following a 4.8% increase in Q3 2022 increase. Even though government stimulus is mostly gone for individuals, more people are employed in history with rising wages.
What Does This Mean to Me?
Technically, the S&P 500 appears to have bottomed on October 12, 2022. Since this low, the index has remained in a mild uptrend, with each new rally peaking above its previous high and selloffs stopping above the previous low. Currently, the S&P 500 is above its 20, 50, and 200 Day Moving Averages (DMA), a positive indicator for the recent trend.
NASDAQ had a deeper selloff in 2022 and has rallied strongly so far in 2023. Currently, the index is up 13.32% YTD and within 2.8% of its previous high, also reached on February 2, 2023.
We have mentioned many times over the past decade the value of monitoring consumer spending and institutional investors. Institutional investors influence the majority of the stock market. We have said that we don't need to know what the institutional investors know, the most informed investors, but what they are doing. Since early December 2022, institutional investors have been buying more stocks than they are selling. We maintain our favorable view of the economy and stock market.
Let us know if you have any questions about this Weekly Brief or your financial situation. We welcome the opportunity to be of service to you.