Opportunities When Consumer Sentiment is Low

The S&P 500 entered bear market territory (20% loss) during the second week of June. Inflation has taken over as the main worry on every investor’s mind. The Nasdaq has been in a bear market since February. This sell off is nothing new to growth investors. 

Putting aside inflation for a minute. The rest of the economy is very strong. Unemployment is at 3.6%, consumer and corporate balance sheets are solid. 

But inflation trumps everything. Consumer sentiment (a measure of how people feel about their personal finances and the state of the economy, on a scale of 0-120) is currently below levels worse than the peak of the COVID-19 pandemic. Consumers actually feel worse about inflation, than a global pandemic. Going back to the 1950s, consumer sentiment has averaged 86. The latest reading at 50.2, the lowest on record.

Consumers are reminded daily how expensive things have gotten. Gas and food prices seem to be unrelenting. 

Taking the worst sentiment readings throughout history and comparing them to the stock market returns for the next 12 months shows a positive return in all scenarios. There is pain leading down to these poor sentiment readings, but it doesn’t take long to show positive returns once sentiment reaches lows. 

On the other side of the coin, the S&P 500 returned an average of 4.1% once sentiment reached and all-time peak, dating back to the 1950s. That includes the +29% return when sentiment peaked right before the pandemic at over 100. Strip that 29% out, the average return after peak sentiment is 0.6%. It’s apparent that the stock market does well when the consumer taps out. Not so well when the consumer is exuberant. 

Essentially returns are better when prices are low, and worse when prices are high. Things have to break in order to get the low prices. 

The dates above were coincide with some ugly historic events. The 70s started with an oil embargo by OPEC countries, as retribution for US support of Israel. In 1980 the economy was reeling from rate hikes under the Volcker Fed, who successfully beat persistent inflation. 2008 was the housing and financial crisis that brought the world economy to a halt. 2011 was the US debt ceiling debate and US credit downgrade, along with Greece near default. 

“Buy when there’s blood in the streets”, Warren Buffet, who recently bought while sitting out most of the pandemic stock boom. While we don’t advise holding that much cash (unless you have billions already invested like he does), it should be a sign when the world’s greatest investor is buying when things look so bleak. 

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