The Sentiment Data That Cried Wolf
Consumer Expectations – The Conference Board
CEO confidence recently hit the lowest level, by one measure, in fifteen years and yet Q1 earnings have been strong and ahead of Wall Street expectations.
Consumers, according to The Conference Board and the University of Michigan, are in a panic and yet spending at retail and among Visa customers show few signs of weakness.
Workers report that they are increasingly fearful of losing their job even though layoffs, according to weekly jobless claims, haven’t budged off very low levels.
Stagflation headlines from the ISM and PMI as well as from the regional Fed surveys dominate the financial media and yet stocks remain at historically high valuations.
In short, the sentiment, also referred to as “soft” data, has become less reliable at predicting the “hard” data and as a result, these headlines have less impact on stocks than in years past. Investors increasingly dismiss these reports because they no longer act like the leading indicators they are supposed to be. Response rates have fallen significantly and those that do respond increasingly convey their political orientation more than they provide any economic insight.
This week, the Treasury Secretary Scott Bessent observed that while institutional investors have been large net sellers of US stocks, retail has been aggressively buying the dip. Retail investors have learned over the last fifteen years that every dip is a buying opportunity, and that the soft data is to be ignored. Yesterday, in a conversation with the CIO of a large broker-dealer, we were told that this was a bullish dynamic. We disagree, as we see the thrust of retail buying as a sign of complacency. Our experience is that the market tends to punish retail investors when they get aggressive when the pros are selling. Our argument is not that the sentiment data still has the same value as in the past, but that there are other important signposts that the US and global economy could slow precipitously.
Oil in the US is trading below $60 despite the fact that global inventories are tight. The biggest commodity in the world is telling you that future demand will fade. Short-term US bonds continue to rally which suggests that tariff driven inflationary pressure is likely to be more than offset by flagging demand. These are big liquid markets that should not be ignored. On the earnings front, while Q1 has been solid about halfway through reporting season, guides have been largely weak and estimates for the year continue to rachet lower.
Also, while demand in March and April has remained strong, it is hard to know how much of that is consumers and corporations buying ahead of tariffs. When inflation expectations rip higher like they have recently, we know intuitively that is going to pull forward consumption.
Human beings are creatures of habit and investors, especially retail, tend to follow the patterns that have worked best in recent times. Those patterns tell us to ignore the sentiment data, ignore the bears and buy the damn dip. Well, eventually and inevitably there is going to be a dip that turns into a bear market.
So the question becomes: will or when does the hard data start to weaken? The key is the labor market where the leading indicators like temporary worker demand, job openings, hours worked, full-time job losses and quit rates continue to suggest that the bellwether reports like payrolls and initial weekly claims are likely to begin to roll over in the coming months as the reality of tariffs begin to manifest.
We have repeatedly referred to this administration’s economic policy of high tariffs as an unprecedented and radical economic experiment. Who knows, maybe it will work out better than we think, but the reality is that whatever template has worked in the past, in terms of market behavior, is essentially irrelevant to what is taking place right now. The fact is that no economist or market strategist knows how this experiment will play out.
Remember that in the fable, the villagers learned to ignore the shepherd boy until of course, all the sheep get killed.
Tim Pierotti is WealthVest’s Chief Investment Officer.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
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