For decades the market has correlated closely with consumer sentiment. As people reported less optimism resulting in lower readings of the University of Michigan Consumer Sentiment index, stock market indices would also decline. An understandable correlation between how consumers feel and the stock market due to that consumer spending represents 66% of the US economy. However, in no time since 1951, when the University began reporting on consumer sentiment, have people been so dire than now. The only time that people were close to as pessimistic as they reported in June's reading was May 1980.
I get why people were depressed in 1980. After living through the 1970's decade with events that included the OPEC oil embargo spiking gas prices and restricting supplies to the US that caused mile-long lines at gas stations. The Vietnam war, President Nixon's impeachment, President Carter, and IRAN hostage crisis. By the time President Reagan was elected, the Prime lending rate was 18% and rising to eventually peak at 21.5%. Fixed mortgage rates reported by MacroTrends were at 16.5% in March 1980 and peaked at 18.44% in October 1981. Inflation was persistently above 9%, and unemployment was over 7%.
In May 1980, the University of Michigan reported the lowest sentiment reading in its history at 51.70.
Paul Volcker was appointed as Chairman of the Federal Reserve in 1979 with the daunting task of slowing inflation and stimulating the economy with interest rates already at historic highs. Slowing inflation is typically done by raising federal fund discount rates, as current Chairman Jerome Powell has done this year. However, Chairman Volcker already had sky-high rates, and to stimulate the economy, and typically the federal reserve lowered rates.
Investors and the federal reserve must have been at a complete loss for what to do. Raise rates to slow inflation and crush what's left of the economy, or lower rates and risk more runaway inflation? By May 1980, consumers were cannon fodder for the 1970s poor monetary and government policies and why the understandable historic lowest sentiment reading. The pain wasn't over for consumers; as a surprise to everyone, Paul Volcker and the committee chose to fight inflation and raised rates even higher in his first two years as Chairman. Then began a slow Federal Reserve rate decline policy that continued for the next several decades. National fixed mortgage rates did peak in October 1981 to reverse into a multi-decade rate decline to bottom in December 2020 at 2.67%, as illustrated below by MacroTrends.
Well, according to June's historic record low sentiment reading of 50.0, consumers are more discouraged than their 1980s counterparts. It appears consumers seemingly can't take many more months of the pain of the lowest unemployment reading in 30 years reached only twice since 1940, 10 million job openings, S&P 500 up 22.7% since January 2020, including this year's selloff, inflation at 5.4%, and mortgage rates at 7%!
I am not sure if the University has changed its polling process or if consumers have been so lulled by years of unrealistic ultra-low interest rates with inconceivable rising prices of stocks and housing that a revision to normalcy is shocking. So much so that pessimism has reached new low levels that surpass all challenges consumers have faced since 1951.
I would suggest that consumers are simply out of touch with history or weak, or both. Most important to know is current economic fundamentals are far better than previous challenging periods and even better than most strong economic growth years.
For reference, from 1995 to 2000, national housing prices increased by 23%, and the S&P 500 increased by 219%. The technology industry rocketed in growth as companies introduced new products, and many of these companies had Initial Public Offerings (IPOs) some stocks increased over 100% on their first trading day. NASDAQ doubled the return of the S&P 500, increasing by 441.2%.
During this same period, 30-year national fixed mortgage rates averaged 7% and were above 9% in 1995. Unemployment was 5.6% in 1995 and slowly declined to 4.1% by December 1999.
Previous periods of far greater national financial stress have been experienced and, in all cases, were followed by economic recovery and stock market rally to new all-time highs that all are well below yesterday's close. It remains to be seen when and not if the next economic recovery and market rally will surpass January 2022 market record high.
What Does This Mean to Me?
The pressure cooker developing in China finally exploded over the weekend. It was only a matter of time before, even at great personal risk, Chinese residents would begin to openly protest the ridiculous, unproven, and failing zero-tolerance Covid policy. People's experiences were evidently dramatically different than what the Communist Party constantly reported on Party news networks about Covid. Weekend reports of mass protests in China were inevitable and predictable. In the US, we can protest reprehensible policies and go home for dinner that evening. In China, protesters are whisked away by the police and never seen again. That risk and still participating in protests indicates how desperate the situation is in China. We reported in our Weekly Brief, “Rebalancing the US Economy” that 76% of manufacturing companies are either leaving or making plans to relocate out of China. Combined with the news about Russia's apparent failing Ukraine invasion and the significant drain of their resources along with the EU's energy challenges, all point to the significant value and position of the US economy. If the US economy was in a mild recession, as some analysts predict for 2023, it still would be in better financial shape than all G-7 nations. However, the economy is not in a recession, nor are consumers in desperate financial conditions and protesting in the streets for relief.
We have maintained our favorable view of the economy and stock market partially due to the continued challenges most other nations are facing. The biggest concern among analysts for the US economy, despite historic low unemployment and rising wages, is the Federal Reserve will drive the economy into a recession. However, nobody seems to mention what would happen if the Federal Reserve had not started raising rates? The housing and mortgage markets would be skyrocketing to another repeat of the 2008 financial crisis. Corporate and individual lending would soar to new levels of debt, potentially driving banks and financial institutions holding unprofitable sub 3% mortgages into similar 1980s Savings & Loan crises. No mention of slowing runaway government debt spending of the past two years rationalized by formally low-interest rates. If the Federal Reserve rate hike policy does cause a mild recession, that still would be a better outcome than if the Feds had not raised rates. In fact, I would surmise the same critics of the Fed's rate hike policy would be the same to chastise the Fed's for not raising rates fast enough had any of the above scenarios come to fruition.
Call us to discuss how we can specifically design your investment and savings strategy to capitalize on this market correction. We welcome the opportunity to assist you and your family through yet another correction as you pursue your financial and personal goals.