Consumer Sentiment and The Bull Market
Since 1966, the University of Michigan has done a great job of surveying consumers about their outlook on the economy. Consumer confidence and sentiment are key variables in our forecasting framework for the U.S. stock market. Additionally, we also look at sentiment market statistics like the bull/bear and put/call ratios. Here at Greenport we are considering adding a third, albeit admittedly less scientific, measure of sentiment. Our incoming client emails! We love hearing from you, so please keep sending us your thoughts or concerns. In all seriousness though, it’s amazing how the sentiment of the emails in our inbox have changed recently. Up until the last couple of months emails were decidedly more negative about the stock market’s prospects. Now we dare say that some clients are downright neutral on the stock market!
Here are some sentiment charts as they stand today.
Positive sentiment is positive for markets until it reaches an extreme or euphoric level. At that point, economic reasoning is absent, and this leads to paying foolish prices for assets. As we wrote in our 2018 outlook, how consumers feel about the economy and stock market is a fantastic forecaster of market momentum, until it isn’t. It’s difficult to know how much positive sentiment is too much. Bubbles can persist and move higher for long stretches. Looking at the graph above, consumer optimism and sentiment are higher, but we don’t think they are too high based upon prior readings and our views on current stock market valuations. We are confident that stock market valuations are based on realistic expectations. Equity markets worldwide are off to a very strong start in 2018. The US dollar has weakened against major currencies, enhancing returns from international markets. Despite the huge run-up in stock prices over the past year, there has been only modest multiple expansion.
Looking at the chart above, forward P/E ratios are currently at 18.4 for the S&P 500. When looked at in isolation, this is not particularly high by historical standards and easily justified within the current low inflation environment. If we take this ratio a step further and divide it by the consensus earnings growth (PEG) over the next five years, we find a valuation variable that is right around its historical average.
We take comfort in the fact that although some fear has subsided, there is still plenty of fear remaining. FDR famously said at the depths of the depression, “the only thing we have to fear is fear itself.” We would alter that quote slightly when applying it to financial markets, “the only thing we have to fear is not enough fear.” If you feel that you have too much fear (not enough stock exposure) or too little fear (too much stock exposure), give us a call and let’s discuss your portfolio. The Greenport Team