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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Visualizing China’s $18 Trillion Economy in One Chart

China’s economy reached a GDP of 114 trillion yuan ($18 trillion) in 2021, well above government targets. What sectors drove that growth?

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Visualizing China's Economy By Sector in 2021 Shareable

Visualizing China’s $18 Trillion Economy in 2021

China is the world’s second largest economy after the U.S., and it is expected to eventually climb into the number one position in the coming decades.

While China’s economy has had a much rockier start this year due to zero-tolerance COVID-19 lockdowns and supply chain issues, our visualization covers a full year of data for 2021⁠—a year in which most economies recovered after the initial chaos of the pandemic.

In 2021, China’s Gross Domestic Product (GDP) reached ¥114 trillion ($18 trillion in USD), according to the National Bureau of Statistics. The country’s economy outperformed government targets of 6% growth, with the overall economy growing by 8.1%.

Let’s take a look at what powers China’s modern economy.

Breaking Down China’s Economy By Sector

Sector2021 Total GDP
(Yuan)
2021 Total GDP
(USD)
% Share
Industry¥37.3T$5.9T32.6%
Wholesale and Retail Trades¥10.5T$1.7T9.2%
Finance¥9.1T$1.4T8.0%
Farming, Forestry, Animal Husbandry, and Fishery¥8.7T$1.4T7.6%
Construction¥8.0T$1.3T7.0%
Real Estate¥7.8T$1.2T6.9%
Transport, Storage, and Post¥4.7T$0.7T4.1%
Information Transmission, Software and IT Services¥4.4T$0.7T3.9%
Renting & Leasing Activities and Business Services¥3.5T$0.6T3.1%
Accommodation and Restaurants¥1.8T$0.3T1.6%
Others¥18.1T$2.8T15.9%
Total¥114T¥18T100.0%

Industrial production—activity in the manufacturing, mining, and utilities sectors—is by far the leading driver of China’s economy. In 2021, the sector generated ¥37.3 trillion, or one-third of the country’s total economic activity.

Despite a slowdown in December, wholesale and retail trades also performed strongly in 2021. As the main gauge of consumption, it was affected by lockdown measures and the spread of the COVID-19 Omicron variant towards the end of the year, but still rose by double digits, reaching a total of ¥10.5 trillion*.

“Other services”, which includes everything from scientific research and development to education and social services, generated 16% of China’s total economy in 2021, or ¥18.1 trillion.

*Editor’s note: At time of publishing, China’s government seems to have since adjusted this number to ¥11.0 trillion, which is not consistent with the original data set provided, but worth noting.

Where is China’s GDP Headed?

China’s economy recovered noticeably faster than most major economies last year, and as the overall trend below shows, the country has grown consistently in the years prior.

Visualizing China's GDP Growth

Before the pandemic hit, China’s quarterly GDP growth had been quite stable at just above 5%.

After the initial onset of COVID-19, the country’s economy faltered, mirroring economies around the globe. But after a strong recovery into 2021, resurging cases caused a new series of crackdowns on the private sector, slowing down GDP growth considerably.

With the slowdown continuing into early 2022, China’s economic horizon still looks uncertain. The lockdown in Shanghai is expected to continue all the way to June 1st, and over recent months there have been hundreds of ships stuck outside of Shanghai’s port as a part of ongoing supply chain challenges.

China’s Zero-COVID Policy: Good or Bad for the Economy?

While every country reacted to the COVID-19 pandemic differently, China adopted a zero-COVID policy of strict lockdowns to control cases and outbreaks.

For most of 2021, the policy didn’t deter GDP growth. Despite some major cities fully or partially locked down to control regional outbreaks, the country’s economy still paced well ahead of many other major economies.

But the policy faced a challenge with the emergence of the Omicron variant. Despite lockdowns and an 88% vaccination rate nationally, seven out of China’s 31 provinces and all of the biggest cities have reported Omicron cases.

And China’s zero-COVID policy has not affected all sectors equally. Industrial production rose by more than 10% in the first 11 months of 2021, despite city lockdowns around the country. That’s because many factories in China are in suburban industrial parks outside the cities, and employees often live nearby.

But many sectors like hotels and restaurants have been more severely affected by city lockdowns. Many global economies are starting to transition to living with COVID, with China remaining as one of the last countries to follow a zero-COVID policy. Does that ensure the country’s economy will continue to slow in 2022, or will China manage to recover and maintain one of the world’s fastest growing economies?

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Charted: U.S. Consumer Debt Approaches $16 Trillion

Robust growth in mortgages has pushed U.S. consumer debt to nearly $16 trillion. Click to gain further insight into the situation.

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Charted: U.S. Consumer Debt Approaches $16 Trillion

According to the Federal Reserve (Fed), U.S. consumer debt is approaching a record-breaking $16 trillion. Critically, the rate of increase in consumer debt for the fourth quarter of 2021 was also the highest seen since 2007.

This graphic provides context into the consumer debt situation using data from the end of 2021.

Housing Vs. Non-Housing Debt

The following table includes the data used in the above graphic. Housing debt covers mortgages, while non-housing debt covers auto loans, student loans, and credit card balances.

DateHousing Debt
(USD trillions)
Non-Housing Debt
(USD trillions)
Total Consumer Debt
(USD trillions)
Q1 20035.182.057.23
Q2 20035.342.047.38
Q3 20035.452.107.55
Q4 20035.962.108.06
Q1 20046.172.138.30
Q2 20046.342.128.46
Q3 20046.642.208.84
Q4 20046.832.229.05
Q1 20057.012.199.20
Q2 20057.232.269.49
Q3 20057.452.359.80
Q4 20057.672.3410.01
Q1 20068.022.3610.38
Q2 20068.352.4010.75
Q3 20068.652.4611.11
Q4 20068.832.4811.31
Q1 20079.032.4611.49
Q2 20079.332.5311.86
Q3 20079.562.5812.14
Q4 20079.752.6312.38
Q1 20089.892.6512.54
Q2 20089.952.6512.60
Q3 20089.982.6912.67
Q4 20089.972.7112.68
Q1 20099.852.6812.53
Q2 20099.772.6312.40
Q3 20099.652.6212.27
Q4 20099.552.6212.17
Q1 20109.532.5812.11
Q2 20109.382.5511.93
Q3 20109.282.5611.84
Q4 20109.122.5911.71
Q1 20119.182.5811.76
Q2 20119.142.5811.72
Q3 20119.042.6211.66
Q4 20118.902.6311.53
Q1 20128.802.6411.44
Q2 20128.742.6411.38
Q3 20128.602.7111.31
Q4 20128.592.7511.34
Q1 20138.482.7511.23
Q2 20138.382.7711.15
Q3 20138.442.8511.29
Q4 20138.582.9411.52
Q1 20148.702.9611.66
Q2 20148.623.0211.64
Q3 20148.643.0711.71
Q4 20148.683.1611.84
Q1 20158.683.1711.85
Q2 20158.623.2411.86
Q3 20158.753.3112.06
Q4 20158.743.3712.11
Q1 20168.863.3912.25
Q2 20168.843.4512.29
Q3 20168.823.5412.36
Q4 20168.953.6312.58
Q1 20179.093.6412.73
Q2 20179.143.6912.83
Q3 20179.193.7712.96
Q4 20179.323.8213.14
Q1 20189.383.8513.23
Q2 20189.433.8713.30
Q3 20189.563.9513.51
Q4 20189.534.0113.54
Q1 20199.654.0213.67
Q2 20199.814.0613.87
Q3 20199.844.1313.97
Q4 20199.954.2014.15
Q1 202010.104.2114.31
Q2 202010.154.1214.27
Q3 202010.224.1414.36
Q4 202010.394.1714.56
Q1 202110.504.1414.64
Q2 202110.764.2014.96
Q3 202110.994.2415.23
Q4 202111.254.3415.59

Source: Federal Reserve

Trends in Housing Debt

Home prices have experienced upward pressure since the beginning of the COVID-19 pandemic. This is evidenced by the Case-Shiller U.S. National Home Price Index, which has increased by 34% since the start of the pandemic.

Driving this growth are various pandemic-related impacts. For example, the cost of materials such as lumber have seen enormous spikes. We’ve covered this story in a previous graphic, which showed how many homes could be built with $50,000 worth of lumber. In most cases, these higher costs are passed on to the consumer.

Another key factor here is mortgage rates, which fell to all-time lows in 2020. When rates are low, consumers are able to borrow in larger quantities. This increases the demand for homes, which in turn inflates prices.

Ultimately, higher home prices translate to more mortgage debt being incurred by families.

No Need to Worry, Though

Economists believe that today’s housing debt isn’t a cause for concern. This is because the quality of borrowers is much stronger than it was between 2003 and 2007, in the years leading up to the financial crisis and subsequent housing crash.

In the chart below, subprime borrowers (those with a credit score of 620 and below) are represented by the red-shaded bars:

Mortgage originations by Credit Score

We can see that subprime borrowers represent very little (2%) of today’s total originations compared to the period between 2003 to 2007 (12%). This suggests that American homeowners are, on average, less likely to default on their mortgage.

Economists have also noted a decline in the household debt service ratio, which measures the percentage of disposable income that goes towards a mortgage. This is shown in the table below, along with the average 30-year fixed mortgage rate.

YearMortgage Payments as a % of Disposable IncomeAverage 30-Year Fixed Mortgage Rate
200012.0%8.2%
200412.2%5.4%
200812.8%5.8%
20129.8%3.9%
20169.9%3.7%
20209.4%3.5%
20219.3%3.2%

Source: Federal Reserve

While it’s true that Americans are less burdened by their mortgages, we must acknowledge the decrease in mortgage rates that took place over the same period.

With the Fed now increasing rates to calm inflation, Americans could see their mortgages begin to eat up a larger chunk of their paycheck. In fact, mortgage rates have already risen for seven consecutive weeks.

Trends in Non-Housing Consumer Debt

The key stories in non-housing consumer debt are student loans and auto loans.

The former category of debt has grown substantially over the past two decades, with growth tapering off during the pandemic. This can be attributed to COVID relief measures which have temporarily lowered the interest rate on direct federal student loans to 0%.

Additionally, these loans were placed into forbearance, meaning 37 million borrowers have not been required to make payments. As of April 2022, the value of these waived payments has reached $195 billion.

Over the course of the pandemic, very few direct federal borrowers have made voluntary payments to reduce their loan principal. When payments eventually resume, and the 0% interest rate is reverted, economists believe that delinquencies could rise significantly.

Auto loans, on the other hand, are following a similar trajectory as mortgages. Both new and used car prices have risen due to the global chip shortage, which is hampering production across the entire industry.

To put this in numbers, the average price of a new car has climbed from $35,600 in 2019, to over $47,000 today. Over a similar timeframe, the average price of a used car has grown from $19,800, to over $28,000.

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