Copyright Forbes
Many articles are promoting the idea that the stock market gains and the house price rises are producing economic strength and preventing a recession. Therefore, the reasoning goes, ignore the drop in consumer sentiment and the weakness in many consumer-oriented companies. However, that reasoning is flawed. Moreover, the advice to ignore weaknesses is a sign that the peak is near - or already here. The two issues below show why worrying about the economy and the stock market is an appropriate reaction. First, consumer sentiment is at historic lows In "Stock Market Concern: Consumer Sentiment Is At Historic Low" (Oct. 4), I explained the problem: "The 'new high' media reports, the Fed's lower interest rate, and AI speculation have supported investor optimism so far. However, the key support of the economy is consumer spending, and consumers are expressing significant pessimism. Therefore, we may be at one of those fragile stock market peaks that suddenly turns into a surprising downtrend." Here is the graph from that article, showing how low consumers are feeling. (The November preliminary release dropped the measure further, to 50.3.) MORE FOR YOU The survey covers many areas, split between current conditions and future expectations (1-year and 5-year). Both areas are at their lows. It is such weakness that cuts the willingness to spend. Here is the historic graph: Another important area is personal finances, current and expected, with both at their lows. The historic low for expectations is particularly troubling because it shows lower hope for improvement, and it supports the need to take defensive cutbacks. Second, the stock market has negative signs In "Stock Market: Consumer Inflation Shifts Appear To Be Weakening Corporate Growth" (Sept. 29), I focused on companies losing their ability to counter inflation by raising prices. The problem they have run into is consumers' ability to shift their buying habits. The example in the article is the S&P 500 consumer defensive (vs. consumer cyclical) packaged food companies, with Kraft Heinz being the key example. Here is the updated table that shows the results through Nov. 7. The final column shows the cumulative distance the stocks are from an expected real annual return of 6%. Another area to track is S&P 500 consumer defensive household & personal products companies. Here are those results. The bottom line - Do not use optimism to override real concerns Optimism is an emotion. Therefore, ignore its presence, except in one environment - when it is everywhere. That is when it exerts its strongest pull and doubting the enthusiastic crowd seems foolhardy. That is also when a contrary view can be rewarding because most of the buying is done. Therefore, riding today’s widespread optimism means adopting the dangerous strategy of dismissing fundamental concerns.
