Monthly Brief June 2019 – Consumer Confidence
How do we best describe the first half of 2019? Has the jump in equity markets provided a strong start to 2019? Or have we returned to the range we first tested in early 2018? Beyond US large-cap stocks, have investors had the same experience? Has the market moved because of improvement in economic and corporate fundamentals, or has it been sentiment and policy driven?
While the equity advance in 2019 has registered impressive year-to-date returns, a broader perspective suggests that the US market, as represented by the S&P 500 Index, has moved to reclaim highs established over the past 18 months. The new high in mid-June 2019 was just 2.8% higher than the highs reached in January 2018 and less than 1% higher than the September 2018 high point. Certainly, the advance off the December 2018 bottom may unfold to be a catalyst for the next leg higher in equity markets, but it will require careful watching to avoid the trap of another reversal.
Investors’ confidence in further gains would certainly be bolstered if the broader global markets were also rallying. Yet US small-cap stocks, developed international markets and emerging markets have all lagged and remain well below prior highs. What is the message this divergence is sending?
To date, one can make the argument that the global capital markets’ have been driven much more so by news-flow trading than by fundamental investing, with the main culprits having been trade negotiations and central bank policy. One needs only to look back over the past 18 months to see several sharp reversals, many of which are tied to “news” items regarding US trade with China or deciphering what the comments and actions of the Federal Reserve suggest for the future.
While we can’t dismiss the market action year-to-date, confidence in adding risk to portfolios with further equity market gains in mind, would certainly be higher should economic strength and corporate earnings growth corroborate higher equity markets ahead. But the weight of the evidence continues to point towards slowing economic growth and lackluster earnings gains. And this points to further vulnerability to news-driven volatility across the global capital markets.
CHART OF INTEREST – CONSUMER CONFIDENCE
Investor sentiment can be a powerful force in the capital markets. Enthusiastic investors will typically push prices higher, while caution/concern can often result in flattening or falling asset prices. One popular measure of investor sentiment is the Conference Board’s survey of the sentiment of households, typically referred to within the media as the “Consumer Confidence Survey”.
Its intuitive that consumer confidence, or sentiment, can impact investors’ appetite for risk-taking. And this survey shows the tight directional relationship between consumer sentiment and the equity markets (as represented by the S&P 500 Index). While the relationship is far from a perfect indicator, it is informative. In some cases, it appears that sentiment has led to a change in the market’s direction and other times the change in the market’s direction has impacted sentiment. But, regardless of which one leads, it is helpful to know how the Consumer Confidence Survey is trending as one piece of evidence to understand what may lie ahead for the markets. Currently, the relationship suggests caution by consumers year-to-date, despite the bounce in the S&P 500 Index from its late 2018 lows. While this is not enough evidence on its own, history suggests that the probability of further gains in the equity markets are somewhat tempered by 2019’s modest decline in this survey’s measure of consumer’s sentiment.
James Ferrin, CFA
Chief Investment Officer
Quantitative Advantage, LLC (QA) is an investment advisor registered with the Securities and Exchange Commission and is a limited liability company organized in the state of Minnesota. Registration of an investment advisor does not imply any specific level of skill or training. QA Wealth Management is a division of QA.
This information has been prepared by QA, is provided for informational purposes only and does not constitute investment advice. It contains general information, is not suitable for everyone and is subject to change without notice. The views and opinions expressed in this report are solely those of QA and are current as of the date of writing. While the content is provided in good faith to provide a general commentary of current market factors and conditions, the views and opinions expressed are limited in scope and QA makes no representation or warranty as to the accuracy or completeness of the information provided. Past performance of the global investment markets is not a guarantee of future results.
The index performance results referenced in this report represent past performance and are not a guarantee of future performance. Investment returns and principal value will fluctuate and are subject to market volatility, so that a client’s investment, when sold, may be worth more or less than the original cost. Indices are unmanaged and investors cannot invest directly in an index. An index’s performance does not reflect the deduction of transaction costs, management fees, or other costs which would reduce returns.
The S&P 500 Index is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the New York Stock Exchange or the NASDAQ Stock Market. For additional information regarding this index, please refer to the sponsor website at www.standardandpoors.com.
For more information about QA, its investment programs, fees, and the risks associated with the investments which QA may make or recommend, please review QA’s Form ADV disclosure brochure, which is available at www.QAwealthmanagement.com, or upon request from QA’s compliance department by telephone at 866-767-8007, by writing to 10400 Yellow Circle Drive, Suite 303, Minnetonka, MN 55343, or by email to compliance@QAwealthmanagement.com. Please review the Form ADV disclosure brochure carefully before or at the time you enter into an agreement with QA.