With the stock market near all-time highs, investor sentiment clearly remains in the bullish camp. Does this mean the economic recovery is accelerating? Not necessarily.
Experienced investors already know that there can be a large disconnect between the market and the economy, but at some point, they have to converge. The market is a leading indicator on the economy; theoretically, investor sentiment looks into the future with expectations of how an economic recovery is shaping up, which can tell us where the economy is headed.
But expectations don’t always come to fruition.
Currently, the situation appears as though investor sentiment has continued accelerating; meanwhile, recent data are showing that the average American’s sentiment toward the economic recovery is decelerating.
A recent poll by Bloomberg showed that over the past few months Americans have become less optimistic about the potential of the economic recovery.
The poll conducted on September 20-23 indicated that only 27% of respondents believe that the economic recovery will be more robust over the next year, down significantly from the 39% of respondents who believed that the economic recovery would improve during the last survey in June. (Source: “Americans in Poll Doubt Economy Rebound,” Bloomberg, September 25, 2013.)
This is a large disconnect from the current level of investor sentiment. The average American is beginning to lose faith in the strength of the economic recovery, yet investors continue piling into stocks. As I’ve stated many times before, much of the recent increase in the market is primarily due to monetary stimulus, not the underlying strength of the economy.
The problem is that even more Americans are becoming pessimistic … Read More
As my long-time readers are fully aware, one of the concerns I have brought up over this past year has been the reaction in the economy to what I believed would occur—higher interest rates.
As we are now seeing interest rates increase, the result of this action is beginning to seep through into the economy.
One of the pillars of economic growth at any level is consumer confidence. Consumer confidence drives our economy, especially since consumer spending accounts for approximately three-quarters of the total gross domestic product (GDP). While some readers might have disagreed with my forecast earlier in the year, there is no argument at this point—interest rates are rising.
The real question is: what happens to consumer confidence going forward? Answer that, and you will answer the next logical question: what happens to economic growth?
New data are beginning to come out that show consumer confidence is beginning to weaken. According to the Thomson Reuters/University of Michigan’s preliminary U.S. consumer sentiment data results, it appears that consumer sentiment in September will drop to a five-month low.
Consumer sentiment data for September is at 76.8, down substantially from the 82.0 that analysts had expected. In the report, it clearly states that Americans are increasingly concerned about higher interest rates and how they will affect them. (Source: “U.S. Consumer Sentiment Sinks in September on Interest-Rate Fears,” Reuters, September 13, 2013.) And this is what has been my exact fear over the past six months—that economic growth could be curtailed by a drop in consumer confidence as interest rates rise.
Much of the economic growth we’ve seen over the past couple … Read More