In the complex and extensive ecosystem of the US economy, the fundamental core of its sustainability and continued growth largely depends on the consumer.  That’s you and me and how we spend and save our money.  As investors, we monitor consumer spending divided between staples and discretionary.  Expenditures for staples are the largest portion of household budgets – home mortgage, household expenses, food, auto expenses, utilities, etc. 

However, budgets for discretionary goods and services are more important as discretionary spending such as vacations, hospitality, dining, jewelry, and luxury items are typically more profitable for companies than staples.  Also, discretionary budgets can fluctuate dramatically influenced by various factors that include changes in payroll, consumer sentiment, media, inflation, and politics. Since discretionary spending is exactly what it means, consumers can choose not to spend or change their spending behavior. 

What is interesting is the widening spread of sentiment between business owners and consumers.  On Friday, the University of Michigan released its monthly Consumer Sentiment report stating that sentiment has plunged to lows close to record lows reached in 2022 and well below sentiment levels reached during the 2008 Great Recession.   

In fact, consumers have not been this pessimistic during the past 71 years since the University of Michigan started issuing this report excluding 2022 and 2008.  This ultra-down-beat pessimism is perplexing considering more people are working in the history of this country, household savings are increasing, stable inflation, and 7.391 million job openings according to the Department of Labor April’s Job Open and Turnover report.  Yes, it costs more to go shopping, buy gas, and go out to eat, but this level of pessimism is below levels reached during the horrific 1970s included the Vietnam War, the OPEC Oil Embargo, President Richard Nixon impeachment, President Jimmy Carter, Iran hostage, soaring unemployment and double-digit inflation.  The 1970s were challenging years but evidently not as bad as our current terrible economy which is ironically considered one of the world’s strongest.

More important to investors and 401k participants, the S&P 500 has rallied over 20% in 5 of the last 6 years.  Specifically, since January 2019, the S&P 500 has had a cumulative return of 138.2% and NASDAQ a whopping 192.4%.  What this means is a 401k participant with $100,000 on January 1, 2019, who invested in an S&P 500 index fund depositing $500 per month would have approximately $461,670.  If the same participant had invested 100% in a NASDAQ index fund their account would have grown to approximately $760,541!   If their employer offered a matching plan their accounts would have grown even more. 

As consumers see the glass half empty, business owners apparently see the glass half full.  The business optimism index has been at a decade-low since early 2022.  However, since October 2024 business optimism has soared to multi-decade highs until the recent drop due to uncertainty created by tariff negotiations. Even with the recent decline, the Optimism Index remains at multi-decade highs, and with the recent resolution of tariff issues, the index may rebound.  This information comes from the National Federation of Independent Businesses (NFIB).

Business owners have reasons to be more optimistic about their future than households.  Corporate profits have been increasing steadily since Q4 2015 except for huge declines in the first two quarters of 2020. 

However, the wide disparity of sentiment between people and business owners remains confusing.  Many of the people expressing their dire outlooks are employees of these companies that offer rising income after inflation, benefits, and retirement plans to invest with many offering employer matching.  It would be reasonable to conclude pessimistic individuals while business leaders were optimistic if corporate profits were not being shared with their employees.  However, as public companies prosper so do their shareholders, many of whom are the employees of the company.

Our conclusion is that consumers are struggling with the rapid rise of inflation, negative messaging by major media, and individuals discontent with the new administration.  My wife commented on the price of food specifically meat which has doubled in price seemingly in months.  Dining prices have soared and long gone are $50 dinners for two.  One client mentioned that a Chick-fil-A outing with his wife and three kids cost over $120.  So much for fast food at affordable prices.

The current administration has addressed many government policies that have multiple layers of consequences and societal impacts both in the US and internationally.  More disturbing to many is the methodology that President Trump and his administration have implemented with their policy changes. Even if the outcome may be ultimately acceptable, the uncertainty and confusion during the process are leaving many uneasy.

What Does This Mean to Me?

We focus on consumers because they represent 66% of the US Gross Domestic Product (GDP) of the economy.  Consumers tend to spend less when they don’t feel wealthy or are concerned about their finances.  It would be important to see consumer sentiment improve this year for the continued growth of the economy and stock market.  This is especially important for the holiday season retail season that is only a few months away.  Business owners remain positive, which is important because their optimism will influence their capital investments, hiring, and corporate growth campaigns.

The support by key CEOs for President and subsequent stock market rally has dwindled since his inauguration and especially since his April 2 Rose Garden tariff announcement.  The turbulent stock market that followed has settled and now the major indices have rallied back to their January levels.

The major indices are now in a technically positive trend.  The S&P 500 is above its 20-, 50-, and 200-day Moving Average (DMA) which is also true for NASDAQ.  Below is a chart of the major indices YTD through today. Note the soaring MSCI Ex-US index as investors have transferred funds to the international market. 

This is the first time in nearly a decade the MSCI Ex US has led the US major indices.  For reference, since 2013 MSCI Ex US has a cumulative return of 115.1% and the S&P 500 is 318.6% for the same period.  NASDAQ has a cumulative return of a whopping 542.5% or nearly 500% better than the MSCI Ex-US index.

Let us know your thoughts on this UPdate.  Also, we welcome the opportunity to sit down with you to discuss your financial planning and investment strategy and how we can help you and your family achieve your goals.