Slope of Hope. That is how one can describe the last few weeks. Financial market volatility and the overall downward trend are not new for the equity markets. Yet, the drivers of the recent swoon have more to do with perceived expectations as opposed to bona fide fundamentals.
Sure, there are plenty of things to worry about. Trump administration’s swiftness, wavering Federal Reserve monetary policy, oscillating Russia-Ukraine ceasefire, tariff volleys, and moderating economic growth from a torrid pace. All of these have contributed to rising investor anxiety in recent weeks.
This is an apolitical view of the capital market reaction to the current administration actions. It may be hard for investors to believe, but there is more to market volatility than reacting to the latest Trump executive action. Trump administration policies are fundamentally contradictory. Some will boost growth and inflation, while others may curtail growth and be disinflationary. The size, timing, and impact are highly uncertain, yet the current market hinges on “what if.”
There is no better way to observe this dichotomy than sentiment surveys and actual data. We’ll focus on the most important 2/3rds of the economy… consumers. Sentiment and confidence surveys are akin to “How are you feeling today?” If you have a restless night or are on a euphoric cloud nine, one’s physiological circumstances may influence survey responses. Likewise, the influence of the 24/7 news cycle augmented by opinion can sway one’s mental state. Consumer Sentiment has recently taken a drop, yet Consumer Sentiment has been in the doldrums for much of the post-COVID era despite a roaring economy and strong equity market returns. Is the recent market anxiety warranted or a psychological figment?
Contrast that with actual spending or Consumer Consumption. The first observation is that actual consumption is far less varied than sentiment might suggest. Meaning that emotional swings rarely result in significant consumption decisions. Annual consumption growth generally stays in the 3%-6% range with a few notable exceptions. More recently, Personal Consumption, the hard dollar measuring stick, has not shown any uncharacteristic wavering.
Even more telling, the same Consumer Sentiment survey also inquired about consumers’ present situation. Respondents contradicted their sentimental answers with a high degree of optimism about the present situation. So, consumers may be concerned about their future, but not enough to curtail spending.
The market is operating based on the specter of what might happen as opposed to what is actually happening. This is not to say dire speculation couldn’t transpire; it is just that the market may be overreacting to opinionized hyperbole. We try not to react to headlined talking points but build and manage portfolios based on tangible fundamentals grounded in statistical relevance.
Recent Comments