How Shifts in Consumer Sentiment Impact the Stock Market

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Aug. 16 2021, Published 12:31 p.m. ET

On Aug. 13, the U.S. shared the latest consumer sentiment results. The results showcased a decade low, which put consumer confidence at its lowest level since July 2011. Issues like consumer sentiment have a relationship with the stock market, and investors want to know how their assets will respond.

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How does consumer sentiment impact the stock market, and what can the lack of confidence from Americans tell us about the market to come? Let's take a look at how sentiment and stocks play into one another.

Consumer sentiment is down, and stock market indices fall with it

The University of Michigan conducted a survey of U.S. consumers in August that showcases a 13.5 percent drop in consumer sentiment month-to-month. This puts the index at 70.2, which is the lowest it has been at in a full decade. It's also 3.9 points lower than August 2020 or a 5.3 percent drop YoY.

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In April 2020, the consumer sentiment dropped 19 percent over a one-month period. While that fall was steeper, the current sentiment level is darker.

The Dow Jones Industrial Average and the S&P 500 both hit record highs by Aug. 13, but they have since pared some of those gains along with the release of the consumer sentiment survey. While the impact wasn't enough to offset earnings and other positive news, fear played a role in the market's performance.

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The COVID-19 Delta variant is to blame

According to Richard Curtin, the chief economist leading the University of Michigan survey, the COVID-19 Delta variant is all but entirely to blame for the plunging consumer sentiment level.

Curtin wrote on the University of Michigan website, "There is little doubt that the pandemic's resurgence due to the Delta variant has been met with a mixture of reason and emotion. Consumers have correctly reasoned that the economy's performance will be diminished over the next several months, but the extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end."

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While the Fed has been contemplating removing long-term economic stimulus measures and moving up the timeline for the interest rate increase, it seems that the economy has other plans.

Local governments are starting to reinstate mask mandates that adhere to CDC recommendations. According to U.S. consumers, a straight-and-narrow path to economic recovery isn't set in stone.

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How consumer sentiment surveys and the Consumer Confidence Index play into the stock market

Consumer sentiment serves as a leading indicator of the stock market.

A Federal Reserve essay says, "A rising stock market boosts consumer spending by acting as a leading indicator of higher expected labor income."

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While a rising stock market can boost consumer sentiment, external factors like the COVID-19 pandemic can have a negative impact. As a result, the suffering sentiment signals fears of rocky economic times ahead.

Whether the latest consumer confidence is rooted in logic or emotion is tough to say. It's easy to take the Delta variant surges personally, especially after a long 18+ months of dealing with pandemic struggles. Stock markets have set numerous records over the last year and a half, and government officials suggest that our economic recovery is well underway.

All things considered, the stock market's performance can be a burden on consumer confidence, but sentiment can impact the market just as easily.

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