Understanding the Disconnect Between Consumers and the Stock Market
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Understanding the Disconnect Between Consumers and the Stock Market

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Understanding the Disconnect Between Consumers and the Stock Market

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The Disconnect Between Consumers and Stock Markets

Consumer sentiment indices are relatively accurate indicators for the outlook of an economy. They rise during periods of growth as consumers become more financially confident, and fall during recessions as consumers cut back on discretionary spending.

Since the direction of the overall economy also affects stock markets, measures of consumer sentiment have historically moved in tandem with major indices like the S&P 500. Since the COVID-19 pandemic began, however, consumers and stock markets have become noticeably disjointed from one another.

To help us understand why this may be the case, this infographic charts the University of Michigan’s Index of Consumer Sentiment against the S&P 500, before diving into potential underlying factors for their divergence.

A Tale of Two Indices

Before we compare these two indices, it’s helpful to first understand how they’re comprised.

The Index of Consumer Sentiment

The University of Michigan’s Index of Consumer Sentiment (ICS) is derived from a monthly survey of consumers that aims to get a snapshot of personal finances, business conditions, and buying conditions in the market.

The survey consists of five questions (paraphrased):

  • Are you better or worse off financially compared to a year ago?
  • Will you be better or worse off financially a year in the future?
  • Will business conditions during the next year be good, bad, or other?
  • Will business conditions over the next five years be good, bad, or other?
  • Is it a good time to make large purchases such as major household appliances?

A score for each of these questions is calculated based on the percent of favorable and nonfavorable replies. The scores are then aggregated to arrive at the final index value, relative to 6.8—the 1966 base period value.

The S&P 500

The S&P 500 is a market capitalization-weighted index of the 500 largest publicly traded U.S. companies. A company’s market capitalization is calculated as its current stock price multiplied by its total number of outstanding shares.

Market caps change over time, with movements determined by daily stock price fluctuations, the issuance of new stock, or the repurchase of existing shares (also known as share buybacks).

The COVID-19 Divergence

Throughout past market cycles, these two indices have displayed some degree of correlation.

During the bull market of the ‘90s, the S&P 500 generated an astonishing 417% return, and was accompanied by a 75% increase in consumer sentiment. Critically, both indices also peaked at roughly the same time. The ICS began to decline after reaching its record high of 112.0 in January 2000, while the S&P 500 began to falter in August that same year.

Fast forwarding to 2020, we can see that these indices have responded quite differently during the pandemic so far:

IndexJan 2020 Feb 2020 Mar 2020 Apr 2020 May 2020 June 2020 July 17, 2020 
ICS Value99.810189.171.872.378.173.2
ICS YTD0.5%1.7%-10.3%-27.7%-27.2%-21.4%-26.3%
S&P 500 Value3225.52954.22584.62912.43044.33100.33224.7
S&P 500 YTD-0.2%-8.6%-20.0%-9.9%-5.8%-4.0%-0.2%

All figures as of month end unless otherwise specified. Source: Yahoo Finance

The ICS has not yet recovered from its initial decline beginning in March, whereas the S&P 500 has seemingly bounced back during the same time frame.

Examining the Disconnect

Why are stock markets failing to recognize the hardships that consumers are feeling? Let’s examine two central factors behind this disconnect.

Reason 1: Tech’s Dominance of the S&P 500

Recall that a company’s weight in the S&P 500 is determined by its market cap. This means that certain sectors can form a larger part of the index than others. Here’s how each sector sizes up:

S&P 500 SectorIndex weight as of June 30, 2020 (%)
Information technology 27.5%
Health care14.6%
Consumer discretionary10.8%
Communication services10.8% 
Financials10.1%
Industrials8.0%
Consumer staples7.0%
Utilities3.1%
Real estate2.8%
Energy2.8%
Materials2.5%

Source: S&P Global

Based on this breakdown, we can see that the information technology (IT) sector accounts for over a quarter of the S&P 500. With a weighting of 27.5%, the sector alone is bigger than the bottom six combined (Industrials to Materials).

This inequality means the performance of the IT sector has a stronger relative impact on the index’s overall returns. Within IT, we can highlight the FAANGM subset of stocks, which include some of America’s biggest names in tech:

StockMarket Cap as of June 30, 2020 ($)
Apple$1.6 trillion
Microsoft$1.5 trillion
Amazon$1.4 trillion
Google$930 billion
Facebook$668 billion
Netflix$200 billion
S&P 500 average$53 billion

Source: Yahoo Finance

These companies have grown rapidly over the past decade, and continue to perform strongly during the pandemic. If this trend continues, the S&P 500 could skew even further towards the IT sector, and become less representative of America’s overall economy.

Reason 2: The U.S. Federal Reserve

Stock prices typically reflect a company’s future earnings prospects, meaning they are influenced, to a degree, by the outlook for the broader economy.

With an ongoing pandemic and steep decline in consumer sentiment, it’s reasonable to believe that many company prospects would look bleak. This is especially true for consumer cyclicals—companies like automobile manufacturers that rely on discretionary spending.

In a somewhat controversial move, the U.S. Federal Reserve has stepped in to counter these effects by creating the Secondary Market Corporate Credit Facility (SMCCF). This facility operates two programs which ensure businesses have access to funding during the pandemic.

Corporate Bond Purchase Program
The SMCCF is currently buying corporate bonds from an index of nearly 800 companies. Of the ten largest recipients of this program, five are categorized as consumer cyclical:

IssuerCategoryIndex Weight (%)
Toyota Motor Credit CorpConsumer cyclical1.74%
Volkswagen Group AmericaConsumer cyclical1.74%
Daimler Finance NA LLCConsumer cyclical1.72%
AT&T IncCommunications1.60%
Apple IncTechnology1.60%
Verizon CommunicationsCommunications1.60%
General ElectricCapital goods1.48%
Ford Motor Credit Co LLCConsumer cyclical1.34%
Comcast CorpCommunications1.32%
BMW US Capital LLCConsumer cyclical1.25%

Source: Investopedia

This program is intended to support the flow of credit, but its announcement in June also gave stock markets a boost in confidence. With the Fed directly supporting corporations, shareholders are being shielded from risks related to declining sales and bankruptcy.

By the end of June, the SMCCF had purchased $429 million in corporate bonds.

ETF Purchase Program
The SMCCF is also authorized to purchase corporate bond ETFs, a historic first for the Fed. The facility’s five largest ETF purchases as of June 18, 2020, are detailed below:

ETF Name Purchase size ($)ETF Description
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)$1.7 billionTracks an index composed of USD-denominated, investment grade corporate bonds.
Vanguard Short-Term Corporate Bond ETF (VCSH)$1.3 billionInvests primarily in investment grade corporate bonds, maintaining an average maturity of 1 to 5 years.
Vanguard Intermediate-Term Corporate Bond ETF (VCIT)$1.0 billionInvests primarily in investment grade corporate bonds, maintaining an average maturity of 5 to 10 years.
iShares Short-Term Corporate Bond ETF (IGSB)$608 millionTracks an index composed of USD-denominated investment-grade corporate bonds with maturities between 1 and 5 years.
SPDR Barclays High Yield Bond ETF (JNK)$412 millionSeeks to provide a diversified exposure to USD-denominated high yield corporate bonds.

Source: Investopedia

Although the SMCCF’s purchase of ETFs outsize those of corporate bonds, the Fed has signaled its intention to make direct bond purchases its primary focus going forward.

Will Markets and Consumers Reconnect Anytime Soon?

It’s hard to see the S&P 500 moving towards a more balanced sector composition in the near future. America’s big tech stocks have been resilient during the pandemic, with some even reaching new highs.

The Fed also remains committed to providing corporations with credit, thereby enabling them to “borrow” their way out of the pandemic. These commitments have propped up stock markets by reducing bankruptcy risk and potentially speeding up the economic recovery.

Consumer sentiment, on the other hand, has yet to show signs of recovery. Surveys released in early July may shed some light on why—63% of Americans believe it will take a year or more for the economy to fully recover, while 82% are hoping for an extension of COVID-19 relief programs.

With both sides moving in opposite directions, it’s possible the disconnect could grow even larger before it starts to shrink.

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Agriculture

Which Countries Produce the Most Wheat?

Global wheat production is concentrated in just a handful of countries. Here’s a look at the top wheat-producing countries worldwide.

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Visualizing Global Wheat Production by Country (2000-2020)

Wheat is a dietary staple for millions of people around the world.

After rice and corn (maize), wheat is the third most-produced cereal worldwide, and the second-most-produced for human consumption. And considering wheat’s importance in the global food system, any impact on major producers such as droughts, wars, or other events, can impact the entire world.

Which countries are the largest producers of wheat? This graphic by Kashish Rastogi visualizes the breakdown of 20 years of global wheat production by country.

Top 10 Wheat Producing Countries

While more than 80 different countries produce wheat around the world, the majority of global wheat production comes from just a handful of countries, according to data from The Food and Agriculture Organization of the United Nations (FAO).

Here’s a look at the top 10 wheat-producing countries worldwide, based on total yield in tonnes from 2000-2020:

RankCountryContinentTotal yield (tonnes, 2000-2020)% of total (2000-2020)
#1🇨🇳 ChinaAsia & Oceania2.4 B17.0%
#2🇮🇳 IndiaAsia & Oceania1.8 B12.5%
#3🇷🇺 RussiaAsia & Oceania1.2 B 8.4%
#4🇺🇸 U.S.Americas1.2 B 8.4%
#5🇫🇷 FranceEurope767 M 5.4%
#6🇨🇦 CanadaAmericas571 M 4.0%
#7🇩🇪 GermanyEurope491 M3.5%
#8🇵🇰 PakistanAsia & Oceania482 M3.4%
#9🇦🇺 AustraliaAsia & Oceania456 M3.2%
#10🇺🇦 UkraineEurope433 M3.1%

China, the world’s largest wheat producer, has yielded more than 2.4 billion tonnes of wheat over the last two decades, making up roughly 17% of total production from 2000-2020.

A majority of China’s wheat is used domestically to help meet the country’s rising food demand. China is the world’s largest consumer of wheat—in 2020/2021, the country accounted for approximately 19% of global wheat consumption.

The second-largest wheat-producing country is India. Over the last two decades, India has produced 12.5% of the world’s wheat. Like China, India keeps most of its wheat domestic because of significant food demand across the country.

Russia, the world’s third-largest wheat producer, is also the largest global exporter of wheat. The country exported more than $7.3 billion worth of wheat in 2021, accounting for approximately 13.1% of total wheat exports that year.

Russia-Ukraine Impact on Global Wheat Market

Because Russia and Ukraine are both significant global wheat producers, the ongoing conflict between the two countries has caused massive disruptions to the global wheat market.

The conflict has had an impact on adjacent industries as well. For instance, Russia is one of the world’s major fertilizer suppliers, and the conflict has led to a global fertilizer shortage which could lead to food shortages worldwide.

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Markets

3 Reasons for the Fertilizer and Food Shortage

Bad weather, the war in Ukraine, and a shortage of fertilizer have led to fears of a global food crisis. Here are three factors you should know.

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3 Reasons for the Fertilizer and Food Shortage

This was originally posted on Elements. Sign up to the free mailing list to get beautiful visualizations on natural resource megatrends in your email every week.

Bad weather, the Russian invasion of Ukraine, and a shortage of fertilizer have led to fears of a global food crisis.

This infographic will help you understand the problem by highlighting three key factors behind the mounting food crisis.

#1: The Fertilizer Shortage

Since the beginning of the Russian invasion of Ukraine in February 2022, the war has disrupted shipments of fertilizer, an essential source of nutrients for crops.

Russia is the world’s top exporter of nitrogen fertilizer and ranks second in phosphorus and potassium fertilizer exports. Belarus, a Russian ally also contending with Western sanctions, is another major fertilizer producer. In addition, both countries collectively account for over 40% of global exports of the crop nutrient potash.

Here are the top 20 fertilizer exporters globally:

RankCountryExports Value (Billions in USD)
#1🇷🇺 Russia$12.5
#2🇨🇳 China $10.9
#3🇨🇦 Canada$6.6
#4🇲🇦 Morocco$5.7
#5🇺🇸 United States$4.1
#6🇸🇦 Saudi Arabia $3.6
#7🇳🇱 Netherlands$2.9
#8🇧🇪 Belgium$2.6
#9🇴🇲 Oman$2.6
#10🇶🇦 Qatar$2.2
#11🇩🇪 Germany$1.5
#12🇮🇱I srael$1.5
#13🇪🇬 Egypt$1.5
#14🇱🇹 Lithuania$1.4
#15🇩🇿 Algeria$1.4
#16🇪🇸 Spain$1.3
#17🇯🇴 Jordan$1.3
#18🇵🇱 Poland$1.2
#19🇲🇾 Malaysia$1.0
#20🇳🇬 Nigeria$1.0

The main destination of fertilizer exports from Russia are large economies like India, Brazil, China, and the United States.

However, many developing countries—including Mongolia, Honduras, Cameroon, Ghana, Senegal, and Guatemala—rely on Russia for at least one-fifth of their fertilizer imports.

Furthermore, the war intensified trends that were already disrupting supply, such as increased hoarding by major producing nations like China and sharp jumps in the price of natural gas, a key feedstock for fertilizer production.

#2: Global Grain Exports

The blockade of Ukrainian ports by Russia’s Black Sea fleet, along with Western sanctions against Russia, has worsened global supply chain bottlenecks, causing inflation in food and energy prices around the world.

This is largely because Russia and Ukraine together account for nearly one-third of the global wheat supply. Wheat is one of the most-used crops in the world annually, used to make a variety of food products like bread and pasta. Additionally, Ukraine is also a major exporter of corn, barley, sunflower oil, and rapeseed oil.

ProducerGrain Exports in Million Tons (MT)
🇺🇸 United States93MT
🇷🇺 Russia & 🇺🇦 Ukraine87MT
🇦🇷 Argentina 56MT
🇪🇺 EU50MT
🇧🇷 Brazil44MT
Other87MT

As a result of the blockade, Ukraine’s exports of cereals and oilseed dropped from six million tonnes to two million tonnes per month. After two months of negotiations, the two countries signed a deal to reopen Ukrainian Black Sea ports for grain exports, raising hopes that the international food crisis can be eased.

#3: Recent Food Shortages

Besides the war in Ukraine, factors including the COVID-19 pandemic and climate change resulted in nearly one billion people going hungry last year, according to United Nations.

France’s wine industry saw its smallest harvest since 1957 in 2021, with an estimated loss of $2 billion in sales due to increasingly higher temperatures and extreme weather conditions.

Heat, drought, and floods also decimated crops in Latin America, North America, and India in recent months. Between April 2020 and December 2021, coffee prices increased 70% after droughts and frost destroyed crops in Brazil.

In the face of multiple crises, the World Bank recently announced financial support of up to $30 billion to existing and new projects in areas such as agriculture, nutrition, social protection, water, and irrigation.

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