Will The "Vibecession" Affect The Bull Market?

According to the latest preliminary report released by the University of Michigan, consumer sentiment in the U.S. reached its lowest level in seven months, peaking at 65.6 in June. Economists were expecting the consumer sentiment index to come at 72.1 this month, which shows that consumer sentiment has declined at a much faster pace than expected by economists. According to Joanne Hsu, director of the survey, an increase in concerns over persistently high inflation was the main reason behind the deterioration of consumer sentiment recently. In addition, weakening household incomes have also played a part in forcing consumers to take a cautious stance toward discretionary spending. According to Fitch Ratings, real household income growth was 1.7% YoY in Q1, a notable deceleration from around 4.7% in the previous two quarters.

Why Consumers Are So Down On The Economy

Vibecession is a common economic term used to characterize a phase in which consumers often feel negative about economic growth prospects despite economic data showing positive trends. This term was first used by Kyla Scanlon, a Bloomberg economic commentator, in 2022. Despite a strong labor market, continued economic growth, and improving prospects for manufacturing growth, many American consumers remain cautious about the outlook for the U.S. economy. One major reason behind this phenomenon is the Fed’s April update to inflation expectations which rose to 3.5% for the year ahead from 3.2%. Elevated mortgage rates have also played a role in denting consumer sentiment. With the 30-year fixed mortgage rate persistently hovering around 7%, potential homebuyers are postponing their plans to purchase homes indefinitely, affecting the overall sentiment about economic prosperity. Increasing delinquency rates for both auto loans and rental payments also suggest inflation has surpassed wage growth in certain regions, deteriorating the sentiment of consumers.

Nothing Lasts Forever... Or Can It?

Strong consumer sentiment often results in higher spending, leading to corporate earnings growth. Stock prices are closely tied to earnings growth, and markets tend to perform well when consumer sentiment is on the rise. However, interestingly, an abnormally low level of consumer sentiment can signal that the economy has hit rock bottom, which is often a good time to invest in stocks as valuations tend to be very attractive when this happens. As investors, it is important to evaluate both consumer sentiment and investor sentiment before jumping to conclusions. For the week ending June 13, the U.S. Investor Sentiment Index was at 44.59%, which is a bullish reading given that the index ended at 38.97% the previous week. There is a disconnect between consumer sentiment and investor sentiment today, and the short-term market performance will be dominated by changes in investor sentiment.