Investor sentiment vs consumer sentiment

Good morning. Vladimir Putin told Donald Trump that he had no problem with the presence of peacekeeping troops in Ukraine after the end of the war in that country. Or so Trump said yesterday. This is, in the words of one analyst, “bombshell” news that changes the odds of peace significantly — if it is true. But no one is sure if Putin actually said it, and if he said it, whether he meant it. So Trump’s comments didn’t even make front pages. In 2025, in politics as in markets, nobody knows what to believe. Email us something you are certain of: robert.armstrong@ft.com and aiden.reiter@ft.com.

Consumer confidence vs investor confidence

Yesterday we talked about recent soft economic readings that coincided with a drop-off in the University of Michigan consumer sentiment data. One aspect of this disappointing data package was that it hit at a moment when investor confidence measures were mostly riding very high. Here again are the Michigan numbers:

Contrast that with Citi’s Levkovich index, a composite of indicators ranging from margin debt levels to the put/call ratio, which gauges investor vibes on a scale from “panic” to “euphoria”. The index came down a little last week, but is still in the euphoria range:

BofA’s investor sentiment index, which combines growth expectations with equity and cash allocations, came off a little too, but is also quite bullish still:

The American Association of Individual Investors retail investor survey is different. Like the consumer sentiment survey, it is well off the levels of 2024:

On the face of it, bullishness from institutional investors combined with weakening consumer sentiment and some skittishness from retail investors might seem like a bad combination. This is especially true if you think, as some market observers do, that consumer sentiment is a leading market indicator.

The relationship between the two sentiments over history is pretty messy but, at times, suggestive. Here is the Michigan survey plotted against the Levkovich index:

Notice how before the 2008 crisis, consumer sentiment started to wobble while institutional investor sentiment continued rising merrily before crashing. And how consumers’ vibes tracked market performance much better than investors’ from 2013 to 2020.

But Drew Pettit at Citi argues that consumer indicators, like the Michigan survey, have become less relevant to equity markets in the past five years:

Post-pandemic, [what we have is] a broken down relationship between traditional economic and consumer indicators and the stock market . . . 

[Investors] are still investing in cycles, just not in consumer cycles any more. Right now they are investing in technology cycles and secular trends, because they are the biggest weights in the index. Whether [consumers] buy more furniture and whether AI and tech build out more are not one for one.

There is another factor to consider. In America’s K-shaped recovery, consumption is driven more than ever by wealthy households. So how the average consumer feels about the economy may be a weaker indicator of the economic trajectory than it once was. In addition, Brij Khurana at Wellington Fixed Income has noted to Unhedged, the wealthiest households also own the lion’s share of equities. Here is the percentage of stocks owned by America’s 1 per cent:

Perhaps, then, it is only how rich households feel — and more importantly, act — that will matter to stock markets at the margin. And those households and their advisers may be staying in markets in hopes of capturing the “Trump bump” from deregulation and tax cuts. From Khurana at Wellington:

There is a lot of investor enthusiasm that this administration’s real focus is going to be on deregulation and tax cuts, which get you to higher real growth rates. So far the administration has been more focused on tariffs, immigration and cutting spending. The market still has hope that [Trump will deliver] one big reconciliation bill and eventually focus on deregulation and tax reform.

We still don’t think the divergence between investor and consumer sentiment is good news, but it probably matters less now than it once did.

(Reiter and Armstrong)

What is working in US stocks

The S&P 500 has been moving sideways since December 6. This 11-week mediocre stretch follows a year of strong and consistent gains. What has changed? What is working and what is not?   

While the past three months may be sideways in aggregate for large-cap US stocks, that conceals some fairly active internal ups and downs. Almost all stocks slid gently from December through early January. Since then, by fits and starts, a general if imperfect pattern has emerged. Defensive stocks have worked: telecoms, pharmaceuticals and food/beverage/tobacco stocks in particular. On the losing side have been cyclicals such as autos, consumer durables, consumer discretionary and materials. As we noted last week, economically sensitive small caps have struggled, too.

That all suggests a simple story of declining confidence in economic growth. This fits with the squishy recent economic data we wrote about yesterday.   

It’s not that a recession is suddenly imminent. If that were true, we would be seeing corporate bonds’ yield spreads over safe Treasuries widen. But spreads haven’t budged. This looks, instead, like very high hopes for growth being downgraded to merely middling ones. 

(It is worth noting that something like the opposite has been happening to European big caps. They have seen very broad-based gains, with cyclicals like banks and industrials doing particularly well. This is what happens when the market outlook goes from midnight black to charcoal grey.)

But there is another, more important part of the story: lack of leadership from Big Tech. Take out Nvidia, Tesla, Alphabet, Microsoft, Broadcom and Amazon, and the market would be up 4 per cent since early January, rather than down 1 per cent. 

We have been asking for some years now what the market would do if the leadership of Big Tech failed. Now we know what it will do: stop going up.

One good read

Vietnam.