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 about the general direction of the country. According to the poll, 68% of respondents believe that the U.S., as a country, is headed in the wrong direction. That is a huge percentage of Americans who are growing disillusioned.
Frankly, when I look at the constant bickering by our so-called leaders in Washington, I can understand why people are growing frustrated. Whether it is the continued budget deficits, the ever-rising federal debt levels, new healthcare legislation, general animosity, or lack of ability to compromise and deliver results, it’s disheartening.
What’s worse for investor sentiment is that people are becoming even more pessimistic about the job situation. In the poll, 36% of respondents indicated that they believe there will be a stronger jobs situation in the future, down from 42% in June.
The problem with this particular data point is that much of the economy is derived from consumer spending. Even if you don’t lose your job, if you’re worried about a lack of potential jobs in the market, you will grow increasingly uncertain about the future and try to save a little more, meaning you’ll spend a little less.
This goes back to one of the issues I’ve been talking about in these pages: I am worried discretionary spending will be an area that will disappoint earnings expectations. As the economic recovery remains weak, investor sentiment in many market segments is overextended, including stocks that provide discretionary spending items.
We’ve already seen some retail stocks get hit over the past few months, and I think that could continue. In general, I would stay away from those companies selling items that are non-essential or discretionary, or items that aren’t large enough to warrant financing.
Until we see an economic recovery start to accelerate through an improvement in the jobs market, I would be cautious of certain market segments where investor sentiment has gotten too bullish—that especially means companies selling discretionary items, as these could be set for a disappointing holiday season.
This article is brought to you courtesy of Sasha Cekerevac from Investment Contrarians.
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