The University of Michigan released on Friday their Surveys of Consumers reports.  In these reports they identify consumers’ sentiment and confidence based on surveys they conduct each month. 

The February report indicated that consumers’ concerns are growing after January’s index decline, which has continued into February.  From the February surveys, consumers cited mounting worry about rising inflation due to tariffs.  The Consumer Confidence Index dropped 13.5% to 64.7 in February from December’s 74.0 reading.  Joanne Hsu, Surveys of Consumers Director, provided this analysis of the findings:

• “Consumer sentiment extended its early month decline, sliding nearly 10% from January. The decrease was unanimous across groups by age, income, and wealth. All five index components deteriorated this month, led by a 19% plunge in buying conditions for durables, in large part due to fears that tariff-induced price increases are imminent. Expectations for personal finances and the short-run economic outlook both declined almost 10% in February, while the long-run economic outlook fell back about 6% to its lowest reading since November 2023. “

The January drop in confidence brought the index to the lowest reading since January 2024 and well below the highs reached in the first half of last year.

The January report also stated that year ahead inflation expectations by consumers have increased from 3.3% to 4.3%, which is well above the 2.0% target range by the Federal Reserve. 

None of this information is good for the prospects of the US economy.  Consumers’ spending represents 66% of the US economy and when consumers are concerned about their future they spend less.  Less consumer spending reduces corporate sales and revenues and if a continued slowdown persists the economy could be at risk of a recession. 

However, in a bazaar way, investors are secretly celebrating this news.  Investors have been looking for reasons that may prompt the Federal Reserve to lower interest rates soon.  Lower interest rates have multiple near-term benefits for the economy as additional capital is introduced through new loans by consumers and businesses along with savings from refinancing current higher interest rate loans.

However, the wall of worry that consumers seem to be climbing about inflation may not come to fruition.  Inflation is a direct function of greater demand than supply.  Up to recently, the labor market has been functioning at near full employment with employers scrambling to fill job openings.  The last Jobs Openings and Labor Turnover report (JOLT) indicated over 7 million unfilled jobs.  The unemployment rate has been declining and reached a multi-year low of 4.0% in December. 

However, the number of unemployed may start to rise if the administration is successful in its aggressive plans to reduce the number of government workers. The number of those unemployed and looking for jobs (vs unemployed and not looking for a job) may experience a sharp short-term rise.  Fewer people working reduces spending, especially on profitable discretionary items like travel, dining, furnishings, and jewelry.  It will remain to be seen how well those formerly working in government will assimilate into the private sector.  If the time for possibly hundreds of thousands of formerly government workers to secure new employment is extended, then consumer confidence and spending will experience short-term declines.  Also, the reduction in government agencies may also result in delayed government services and disrupt those that depend on government services.

The ultimate possible near-term result of the government staff reduction is a slowing of economic growth and inflation as unemployed consumers reduce their spending and demand for goods and services.  This is a classic case of potential unintended circumstances in the admirable goal of improving the efficiencies of federal government functionality and use of taxpayer’s money. 

What Does This Mean to Me?

After two consecutive years of growth, the S&P 500 has gained 55.1% and NASDAQ has gained 81.78% since January 1, 2023, through today.  After a strong rally, the stock market typically enters a flat or declining short-term trend to assimilate these extraordinary gains.

Interestingly, without much media attention, the stock market has quietly been at a pause for 81 days now with no major economic or political event.   Since December 6, 2024, all major US indices have had a slight negative return and the MSCI Ex-US index, the multi-year laggard of the indices, has a slight positive return for this period. 

This stagnant period of stock prices is good as it builds a new base for values and the opportunity for new investments.  The main media is starting to promote the theory that the bull market is over, and the administration’s policies will swing the rally into a selloff.   This is doubtful but the current reason for the pause is simply profit-taking and assimilation.

We are evaluating and looking for evidence to support our concern that this year may continue to be volatile with modest net returns.  So far, the major indices and high-growth sectors like tech have already experienced wild swings in stock prices.  Just a few weeks ago on January 27, leading AI stocks plummeted 15% - 20% that day with the announcement that DeepSeek was supposedly able to duplicate other AI learning models for a fraction of the price companies like Microsoft, Google, OpenAI, and Oracle have had to spend to accomplish similar results.   All these companies use Nvidia GPU chips and even though Nvidia stock also dropped that day by 17% it has nearly fully recovered the loss.

If market conditions do appear to be more volatile with potentially modest gains, then increased allocations into high-yield income sectors may be a good alternative for the year until a new positive trend develops.  The jury is still out on this prognosis, and we will keep you posted in this UPdate as events develop.

Give us a call if you have any questions about your accounts or financial planning.  We welcome the opportunity to assist you and your family in achieving your financial and personal goals.