Something Doesn't Add Up
Investors,
Extreme pessimism typically occurs at/near major lows in risk assets.
So isn’t it odd that sentiment is THIS bad with the market at highs?
According to University of Michigan data, consumer sentiment is at all-time lows!
Worse than the inflationary spike of the late-70’s that caused Volcker to raise rates.
Worse than the depths of the Great Recession.
Worse than the 2022 lows when 100% of economists predicted a recession.
Something doesn’t add up…
Especially with the S&P 500 looking like this (top: linear, bottom: logarithmic)
Of course, I’ve been a long-time proponent of the phrase “the stock market is not the economy”, but this kind of chart is exactly the reason why…
How can we explain this?
The unemployment rate is 4.3% (vs. peaks of 7.8% in 1980 and 10% in 2009).
So that can’t be the cause of such pessimistic sentiment…
Household net worth is at all-time highs (even after adjusting for CPI inflation).
So that can’t be it either…
Retail sales are at all-time highs, reflecting robust levels of consumption.
So that definitely can’t be it…
Travel, as measured via TSA passenger traffic data, has recovered and is up +28% YoY!
So that probably isn’t it either…
In other words, Americans are wealthier than ever, more employed than ever, consuming more than ever, and are traveling more than ever, with stocks and real-estate at ATHs.
This leads me to a few potential conclusions, though I’m open to hearing your ideas:
Socially & culturally, pessimism has become the trend du jour.
Economic data is not representative of actual economic conditions.
This detachment between asset prices & sentiment is an opportunity.
Since #3 is the only explanation that allows us to exploit it as investors, I want to focus on this option and explore the actual implications of data at this extreme pessimism.