We could go on and on with headlines like the ones above. As equities made new short-term highs last week, the pace of articles suggesting that the rally was being driven by unemployed Americans on their couches with nothing better to do but trade stocks increased at a fever pitch. This is not the type of foundation you want to build a rally on. Either out of work Americans are eventually going to find new jobs as the economy opens up and no longer have time to trade, or they are going to run out of money and have no money to trade.
Given all of these headlines last week, we were eager to see today’s report on Consumer Confidence for May, and more specifically, the section of the report that asks consumers whether they expect stock prices to increase or decline. This is an important indicator of sentiment because rather than gauging the sentiment of investors who likely follow the market on a regular basis, the people surveyed in the Consumer Confidence report provides a more representative sample of the ‘average Joe’. Extreme readings in sentiment on the part of the general public typically represent strong contrarian signals.
One would think that if a large number of consumers were sitting at home trading stocks, then we would see an uptick in general sentiment towards stock prices. That’s exactly what we saw back in late 2017 and early 2018 when stocks were breaking out and bitcoin was going bananas. Shortly thereafter, though, the S&P 500 experienced its first 10% correction in well over a year and then essentially traded sideways for the next year and a half.
In this month’s report, though, the percentage of consumers expecting higher stock prices actually saw a slight decline, falling from 40.8% down to 39.3% while the percentage of consumers expecting stock prices to decline actually rose slightly from 37.6% up to 37.7%. While the percentage of consumers expecting higher stock prices is still slightly higher than the percentage expecting lower prices, the spread remains minimal at 1.6 percentage points. What to make of this report? While on the couch traders have likely played a role in the rally off the March lows, we would say that their actual role in driving the rally is a lot less than the headlines would suggest. Start a two-week free trial to Bespoke Premium to access our most actionable market research and interactive investor tools.