By Paul Vigna
Stocks have rebounded dramatically off their March lows, while
consumer sentiment is hovering near the lowest level in nearly a
decade. The divergence is one of many realities investors are
struggling to reconcile.
The spread between the monthly percentage change of the S&P
500 and the University of Michigan's consumer sentiment survey
climbed to 32 percentage points last month, the widest-ever gulf in
data going back to 1978, according to Dow Jones Market Data.
The drop in sentiment reflects the wave of challenges unleashed
by the coronavirus pandemic. Almost overnight, the economy swung
from an expansion into a deep contraction. Unemployment rose to
record highs from record lows. Personal incomes in March suffered
the steepest drop since 2013, and consumer spending fell at the
fastest rate since 1959. The numbers for April, due Friday, are
expected to be worse.
Yet stocks have continued to rise. The S&P 500 has surged
34% since bottoming March 23, cutting its losses for the year to
"The current situation is quite unique," said Richard Curtin, a
research professor who is the chief economist of the University of
Michigan's sentiment surveys. "Consumers are very negative about
the current economy. It's about as bad as we've ever recorded."
The stock market and sentiment both ultimately reflect
conditions in the economy, he said. But sentiment surveys tend to
closely track economic trends, while stocks can also be influenced
by other factors, including Federal Reserve policy.
The S&P 500's 13% rally in April marked its best month since
January 1987, a rise most market observers attribute to the
unprecedented level of stimulus provided by the Fed. The pace of
the rebound suggests many investors are betting on a V-shaped
recovery--a sharp drop in economic activity, followed by an equally
Although the University of Michigan's consumer sentiment reading
suffered its biggest plunge on record in April, falling 19%, there
were also signals that respondents expect the downturn will be
short-lived. The index of current conditions drove the decline,
while the fall in the expectations index was much more modest.
Mr. Curtin said that is the opposite of what has happened on the
cusp of previous recessions, when current conditions peaked and
expectations bottomed out.
The final results of the May survey are due Friday. The headline
sentiment reading is expected to pick up slightly but hover near
the lowest levels since 2011. In the preliminary report, the index
of current economic conditions rose, but the index of consumer
expectations edged lower, suggesting the path to a recovery is
likely to be rocky.
Mr. Curtin said there can be a lag of a month or two between
stocks and sentiment surveys. In December 2018, for example, the
S&P 500 fell 9.2% on worries about slowing global growth; the
sentiment survey fell 7.2% the next month. In May 2019, the index
fell 6.6% as trade tensions ratcheted higher; the sentiment survey
didn't fall significantly until August when it dropped 8.7%.
The divergence between stocks and sentiment reflects two
different vantage points within a business cycle, said Lakshman
Achuthan, co-founder of the Economic Cycle Research Institute. The
stock market is already betting on the recession's end, he said.
Sentiment, meanwhile, is more closely connected to the jobs market,
"which is taking it on the chin right now."
In April, U.S. employers laid off a staggering 20.5 million
workers. The official unemployment rate, calculated by the Bureau
of Labor Statistics, rose to 14.7%. Standard Chartered analyst
Steven Englander estimated the number is effectively closer to 25%
because the official tally excludes people who have dropped out of
the labor force and millions more that the agency itself said may
have been misclassified as on temporary layoff rather than
unemployed, given the difficulties of conducting the survey during
"At this point, it does not look like May employment data will
show improvement or even stability," Mr. Englander said.
Stock investors, on the other hand, appear to be putting their
faith in the Fed and Congress. The central bank created or expanded
nine lending programs, committing $2.3 trillion, with the promise
of more stimulus if needed. Congress, meanwhile, has appropriated
$2.9 trillion to support households, businesses and state and local
Because of those rescue packages, markets are betting that the
economic damage has a "time limit," said Andrew Zatlin, founder of
SouthBay Research, an investment advisory firm in San Mateo,
Expanded unemployment benefits will mitigate the consumer
damage, he said, while the Fed's liquidity inspired confidence
among investors. Whether the market has gotten ahead of itself, he
said, will become apparent over the next few months as more states
relax restrictions and the economic damage is tallied.
Although the stock market and the economic data appear to be
flashing different signals, the market historically bottoms out a
few months before a recession ends. So even if sentiment is sour
now, it's possible the economy has already hit its trough, Mr.
In 2009, for example, the market bottomed in March, and the
recession ended three months later.
"Technically, you have a recovery," he said, "but it won't feel
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(END) Dow Jones Newswires
May 27, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.