Despite signs the economy is rebounding, Americans are still nervous about what the ongoing pandemic means for their wallets.
Consumer sentiment surveys show a “wait and see” attitude in 2021
Consumer spending is the backbone of the $21 trillion US economy. When times are good and consumers are confident in their jobs and financial situations, they tend to spend more. This boosts sales for businesses large and small, who then hire more workers, develop new products, and make financial investments. Often this creates new jobs and boosts wages — which increases consumer spending further. Thus, how consumers feel is important for investors to consider regarding the health of the economy as stock markets hover near all-time highs.
The average American household has been financially healthier since last summer, when the economy began to reopen. Not only did jobs return quickly in many sectors, but retail spending rebounded, the household savings rate remained high, and the cost of borrowing fell. Together, these factors boosted the balance sheets of many households.
Despite this rosy picture, consumer sentiment surveys suggest that everyday Americans are still cautious. The University of Michigan Consumer Sentiment Index, for instance, shows that overall sentiment is stuck at 2013 levels. This is partly because until enough of the population has been vaccinated, everyday life will continue to be disrupted by the pandemic. This is also because not all households have recovered from the shutdown. Millions of Americans are still without work and many are relying on unemployment benefits and government stimulus.
Tracking consumer sentiment:
Everyday Americans are still nervous about the pandemic
What does this mixed picture mean for investors?
The history of consumer behavior, the economy and the stock market suggests that consumer sentiment tends to track the business cycle. Sentiment is extremely depressed after a crisis. It then slowly recovers over the course of years as memories of economic and financial shocks fade. Finally, late in the cycle, consumers are extremely confident just as stocks are near their final peaks.
Most Americans are keeping their purse strings tight for now
For this reason, consumer sentiment is often a contrarian indicator for investors – i.e., it is often better to invest when consumers are nervous (beginning of the cycle) than when they are confident. At the moment, consumers still have a long way to go before they are able to put the experience of the past twelve months behind them. This is also reflected by a savings rate which is still elevated, suggesting that households continue to be cautious with their spending.
Don’t veer off course — even when markets are uncertain
Consumer sentiment is only a single indicator — but it’s an important one. At the moment, the data suggest that everyday individuals and households still have a long way to go before they feel better about the world. This is another reason for patient investors to focus on the future by staying diversified.
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