Consumer Sentiment – down but still not down enough.

Over many years I’ve marveled at how reliable consumer sentiment has been as a contrarian indicator.  When it reaches rock bottom then the markets, followed by the economy begin to recover from a crisis – whether a recession or financial.  The University of Michigan Index of Consumer Sentiment just came out and is holding relatively steady (just above the 70 level) so far this month.

But as the economic news gets progressively worse, there’s a good chance that consumers will become even more squeamish.  This has been the pattern in previous periods of financial and economic distress.  And the bad news just keeps on coming.

Orders for durable goods sank 14.4% in March largely because of a decline in demand for big-ticket items such as new cars and trucks as the coronavirus swept across the U.S.

The steep drop in bookings last month was the second biggest ever since the government began keeping track in the early 1990s. Orders never even fell that much during the 2007-2009 Great Recession.

A reliable leading indicator is The Industrial Production Index, which fell 5.4 percent in March, as the COVID-19 (coronavirus disease 2019) pandemic led many factories to suspend operations late in the month.  Of course, when the reading for April gets published it will be decidedly much worse. We won’t see a substantial improvement in the economy until this index turns positive again.

If the stock market is the sum total of expectations, then its ‘hanging-in-there’ could simply mean expectations remain overly optimistic for a near term rebound in business activity.  If the reality turns out to be worse than expected, then the markets could head south once again.

If consumer confidence is a contrarian indicator, at what level we expect to see it bottom out?  Based on historical precedence I’d suggest when it gets down to the 60 level we’re at a point where the prospect of recovery is imminent.

Consumer spending is 70% of the US economy, and retail and services account for most of it. We’re in for a wave of disappointing earnings surprises, ugly economic data, sour unemployment reports and a tsunami of bankruptcies before any recovery can be contemplated.  An I’m an optimist.

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