The Stock Market and Consumer Sentiment Are Telling Different Stories
Stocks have rebounded off March lows, while sentiment is near the lowest level in nearly a decade
Stocks have rebounded dramatically off their March lows, while consumer sentiment is hovering near the lowest level in nearly a decade. The divergence is one of many realities investors are struggling to reconcile.
The spread between the monthly percentage change of the S&P 500 and the University of Michigan’s consumer sentiment survey climbed to 32 percentage points last month, the widest-ever gulf in data going back to 1978, according to Dow Jones Market Data.
The drop in sentiment reflects the wave of challenges unleashed by the coronavirus pandemic. Almost overnight, the economy swung from an expansion into a deep contraction. Unemployment rose to record highs from record lows. Personal incomes in March suffered the steepest drop since 2013, and consumer spending fell at the fastest rate since 1959. The numbers for April, due Friday, are expected to be worse.
Yet stocks have continued to rise. The S&P 500 has surged 34% since bottoming March 23, cutting its losses for the year to 7.4%.
Companies across the U.S. are cutting salaries as they fight to survive the coronavirus, upending a key assumption in modern economics and raising another hurdle to rapid recovery.
The hard numbers won’t be in for months, but anecdotal evidence is piling up. On earnings calls, big businesses including The Container Store Group and Lyft have cited what they say are temporary salary reductions. Federal Reserve officials also have found plenty of supporting evidence.
The pandemic has triggered unemployment on a scale not seen since the Great Depression. Pay cuts for Americans who’ve managed to hold onto their jobs may hobble the return to normal. People will have to use a bigger chunk of their income for fixed obligations such as housing and other debts — leaving less for the kind of spending that can help spark the economy back into life.
“It’s one of the reasons why we don’t expect a so-called V-shaped recovery,” said Michael Gapen, chief U.S. economist at Barclays Plc in New York. Americans taking pay cuts “might have little, and in some cases maybe nothing, left over after that for discretionary purchases.”