Review:
On June 11, 2020, we said the following of Consumer Sentiment:
“The rapidity of the stock market decline and recovery and failure to achieve new highs suggests that the Dow Jones Industrial Average, as a sentiment indicator, will retest the prior low (-15.47%) opening up for testing of past graveyard levels.”
Our assessment was wrong as we did not appreciate the fact that there have been few double dips in YoY data on the Dow Jones Industrial Average (only four since 1896).
Outlook:
Below is the data from 1986 to the present for the Consumer Sentiment Survey and the Dow Jones Industrial Average on a year over year basis.
While we have run up against what appears to be the limits of year-over-year gains for the Dow Jones Industrial Average since 1986, there has been eight other occurrence of above 50% y-o-y gains since 1896.
It is possible that the stock market could experience a similar decline of y-o-y increases, as seen from the 1997 peak, where the market moves higher but was unable to exceed the y-o-y gain top of 1997. This resulted in the DJIA going from 8,222 in 1997 to 11,497 in 2000. Likewise, the peak of y-o-y gains in 2010 saw the DJIA increase from 10,325 to 16,516 by 2016 or 21,917 by March 2020.
The University of Michigan Consumer Sentiment indicator has provided little in the way of indicating peaks in the market unless it was in positive year over year territory. Currently, we’re at a distinctly negative level in the Consumer Sentiment indication with only two other periods (2008 & 1991) registering worse levels.
Essentially, consumer sentiment could get worse but not by very much and not for too long of a period in time before a recovery will ensue. Our general view is that a recovery to positive levels in y-o-y changes in the Consumer sentiment level is necessary before the next protracted decline can materialize.