Opinion: American consumers’ gray mood could put the S&P 500 in the green over the next 6 months

Opinion: American consumers’ gray mood could put the S&P 500 in the green over the next 6 months

Last week’s unexpected plunge in the University of Michigan Consumer Sentiment Index is actually good news for U.S. stock investors. That’s because the American consumer is a contrarian stock-market indicator. More often than not over the past four decades, large declines in consumer confidence have been followed by above-average stock market returns.

This should come as a big relief for Wall Street bulls, who have otherwise been fretting about the University of Michigan index’s latest reading. From a July level of 81.2, the index fell last week to 70.2. That’s the lowest since December 2011 — lower even than the lowest reading registered in the darkest early weeks of the COVID-19 pandemic.

To appreciate how much this latest reading was unexpected, consider that the economists surveyed in advance by MarketWatch were predicting, on average, that the index would come in at 81.3 — a slight right rise from the July number.

To analyze the significance of drops as big as this latest one, I calculated the correlations between monthly changes in the University of Michigan index since 1978 and the S&P 500’s SPX, +0.43% subsequent performance on both an inflation- and dividend-adjusted basis. I found that whenever this sentiment index dropped by at least 10 percentage points, the S&P 500 over the subsequent three months gained an average of 3.6%.

That’s double the 1.7% average three-month gain following months in which the consumer sentiment index gained at least 10 percentage points. Moreover, as evident in the chart below, this contrast at the six-month horizon is even greater: 7.5% versus 2.6%.

To be sure, there aren’t that many months since 1978 in which the consumer sentiment index rose or fell by this much. The inverse relationship between the sentiment index’s monthly changes and the U.S. stock market’s subsequent performance is only marginally statistically significant. So you should not use the occasion of the sentiment index’s big drop to throw caution to the wind.

Nevertheless, if you want to believe that this historical relationship is statistically insignificant, you still can’t conclude that this most recent drop is a bad sign. You’d instead have to conclude that the University of Michigan index tells you nothing about the stock market’s prospects in coming months.

So there you have it. Either this latest drop means nothing, or it is bullish. If you want to believe that this latest drop is bad news, you will have to base your argument on something other than U.S. stock market history since 1978.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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European Markets Close Slightly Up After Lackluster Session

(RTTNews) - European stocks closed slightly higher on Monday after a highly lackluster session as disappointing economic data weighed on sentiment.

Reports that Beijing is looking at new rules that would restrict domestic internet firms from going public in the U.S. also contributed to the subdued mood in the markets.

Investors continued to react positively to Federal Reserve Chairman Jerome Powell’s remarks at the Jackson Hole symposium last week that the bank is likely to begin tapering some of its easy money policies before the end of the year but there’s “much ground to cover” before rate hikes happen.

The pan European Stoxx 600 edged up 0.07%. Germany’s DAX gained 0.22% and France’s CAC 40 crept up 0.08%, while Switzerland’s SMI declined marginally. The U.K. market was closed for a bank holiday.

Among other markets in Europe, Denmark, Finland, Greece, Iceland, Ireland, Netherlands, Poland, Portugal, Russia and Turkey closed higher.

Norway and Spain closed weak, while Austria, Belgium, Czech Republic and Sweden ended flat.

In the German market, Thyssenkrupp and Covestro both gained more than 2%. Henkel, BASF, BMW, Infineon Technologies, Daimler and Deutsche Post closed with moderate gains.

Munic RE, Fresenius Medical Care, Deutsche Telekom and Lufthansa ended notably lower.

In France, STMicroElectronics, Vivendi, Air Liquide, LOreal, Teleperformance and ArcelorMittal closed with sharp to moderate gains.

Faurecia, Air France-KLM and Societe Generale lost 1.4 to 1.7%. Technip, Saint Gobain, Valeo, Sodexo and BNP Paribas also ended notably lower.

In economic releases, Eurozone business and household confidence declined slightly in August, following July’s record high, the European Commission said.

The economic sentiment indicator, an aggregate measure of business and consumer confidence, dropped to 117.5 in August from 119.0 in July.

The industrial sentiment index came in at 13.7, down from 14.5 in the previous month. The reading was forecast to ease to 13.4.

The consumer confidence stood at -5.3 in August, in line with flash estimate, and down from -4.4 in the previous month. The services confidence declined more-than-expected to 16.8 from 18.9 in the previous month. The expected level was 18.8.

The economic confidence index for the EU came down to 116.5 in August from an all-time high of 118.0 in July.

Data from Destatis showed Germany’s inflation accelerated to its highest level since 2008 in August driven by energy prices. Consumer price inflation rose to 3.9% in August, as expected, from 3.8% in July.

EU harmonized inflation advanced to 3.4% from 3.1% a month ago. The HICP annual rate also matched economists' expectations. The final data for August is due on September 10. The 3.4 percent inflation was the highest since 2008.

Switzerland’s economic sentiment weakened for a third month in a row and at a sharp rate in August, suggesting that the recovery from the pandemic is set to continued albeit at a slower pace, results of a survey showed.

The Economic Barometer fell to 113.5 from 130.9 in July, revised from 129.8, the monthly survey by the KOF economic institute showed. Economists had forecast a score of 125.0.

The European Central Bank (ECB) will meet next week to announce its monetary policy. ECB chief Christine Lagarde last month promised sustained support for the single currency zone, saying the central bank has learned from the errors of past crises and won’t derail the current economic recovery by withdrawing emergency support too early.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

U.S. Consumer Sentiment Stays at Pandemic Lows in Late August on Delta Fears – University of Michigan

By Xavier Fontdegloria

U.S. consumer sentiment was little changed in the second half of August, remaining at pandemic lows as concerns over the spread of the Covid-19 Delta variant unsettled households.

The final reading of the index of consumer sentiment compiled by the University of Michigan was 70.3 in August, virtually up from the mid-month flash estimate of 70.2 but down sharply from July’s 81.2, data released Friday show.

The reading is below expectations from economists polled by The Wall Street Journal, who forecast consumer sentiment index to come in at 71.0.

“There was no lessening in late August in the extent of the collapse in consumer sentiment recorded in the first half of the month” said Richard Curtin, the survey’s chief economist.

The drop in consumer sentiment in August left the index at a 10-year low, well below the 101.0 level registered before the pandemic in February 2020.

The losses in sentiment were especially large in the expectations index, and widespread across all demographic groups, regions and the outlook for the economy, Mr. Curtin said.

The index of consumer expectations, which reflects the balance of respondents anticipating improved business conditions in the next six months, decreased to 65.1 from the 79.0 reading registered in July, and was broadly unchanged from the preliminary estimate of 65.2.

“Consumers' extreme reactions were due to the surging Delta variant, higher inflation, slower wage growth and smaller declines in unemployment,” Mr. Curtin said.

The index gauging Americans' assessment of the current economic conditions fell to 78.5 in August from 84.5 in July. The preliminary mid-month reading stood at 77.9.

The August collapse of confidence doesn’t imply an imminent downturn in the economy, Mr. Curtin said. The emotional impact from the pandemic on spending patterns could be behind the current decline in sentiment as consumers' hopes that the pandemic would soon end weren’t met, he said.

Write to Xavier Fontdegloria at xavier.fontdegloria@wsj.com