Consumers turn bearish for the first time in a year
Key points:
- More U.S. consumers now expect stocks to fall than rise
- That ends a streak of more than a year of bullishness
- The ends of other streaks led to rising stocks 7 out of 8 times
The end of a long streak of optimism
As a general rule, consumers in the U.S. would rather, well, consume than invest. Saving rates are low, and consumption accounts for about 70% of GDP.
It's hard to escape the fact that stocks usually go up, even among those who don't regularly invest. So most consumers usually expect stocks to rise over time. And they've had that expectation for more than a year.
That changed in October. For the first time since July 2020, more consumers expect stocks to fall in the coming months than rise. The latest survey from the Conference Board showed that 2.7% more consumers are bearish than bullish. That's the 4th most negative spread since the start of 2017.
Some of the most significant monthly rebounds have occurred when consumers had been negative on stocks, so the S&P 500's annualized return when there are more bears than bulls is almost double what it is when bulls are in the majority.
October's dip into bearishness ended the 9th-longest streak with more consumer bulls than bears since 1987.
Bearish consumers were good for future stock returns
When consumers turn negative on stocks for the first time in over a year, it has preceded some weakness at the beginning of the next month, then stronger-than-average returns in the months ahead.
The only time when consumers ended up justified in their concern was in 2001. Six of the seven others preceded a double-digit gain in the S&P 500 during the following year. The only two signals in the past decade were immediate buy signals.
There was a modest tilt toward higher-beta sectors and factors after other signals.
What the research tells us...
This year hasn't been very accommodating to historical norms. There are some signs that sentiment is a bit overheated in the short-term, while some longer-term measures are still lukewarm or even on the pessimistic side of things, including among consumers. That has been mostly a positive sign over a 6-12 month time frame.