How Trusting Are You?
Dear subscriber,
The most important recession indicator isn't gross domestic product. Nor is it the unemployment rate or an inverted yield curve.
It's you... the consumer.
When predicting recessions, the most important metric to focus on is consumer confidence.
If folks are optimistic that their income will keep rolling in and that the value of their stocks and bonds won't fall, they'll be more willing to go out and buy stuff. That's what keeps the economy moving.
So, really, the path of the market is up to you.
As I shared last week in an adapted essay from my colleague Dr. David "Doc" Eifrig, we're at an inflection point.
Will stocks continue to climb? Or will the rally reverse course?
Right now, that depends on whether a slowing economy or lower interest rates have more influence on the market. And the deciding factor there will be how consumers and businesses feel.
As the Nobel Prize-winning economists George Akerlof and Robert Shiller explain in their book Animal Spirits, consumer confidence is really about trust...
[The economist] view suggests that confidence is rational: people use the information at hand to make rational predictions; they then make a rational decision based on those rational predictions. Certainly people often do make decisions, confidently, in this way. But there is more to the notion of confidence. The very meaning of trust is that we go beyond the rational. Indeed the truly trusting person often discards or discounts certain information. She may not even process the information that is available to her rationally; even if she has processed it rationally, she still may not act on it rationally. She acts according to what she trusts to be true.
If you recall, in late 2022, everyone was convinced the economy would slip into a recession.
From recession-probability surveys to economists' forecasts to yield-curve indicators... it was a given that the Federal Reserve had missed its soft landing and that we'd see a slowing economy.
And economic growth has slowed. But we haven't seen a recession... at least, not yet.
The problem with the recession prediction back in 2022 was the consumer.
Consumers stayed strong. They still had stimulus money to spend, and they trusted they'd be alright. That powered the economy through the expected recession.
So now, as we're at an inflection point, we need to know whether or not people trust the economy going forward.
This week on Wall Street, the Conference Board released its Consumer Confidence Index for September.
The index breaks down into the Present Situation Index and the Expectations Index, which seek to answer two questions... How do you feel about the economy currently? And what do you expect for the economy in the near future?
As you can see, the Present Situation Index and the Expectations Index are headed down. That means consumers are feeling less confident about current conditions, and they don't feel great about what's to come, either...
The Present Situation Index is at a low we haven't seen since the pandemic. The Expectations reading has fallen to 81.7. According to the Conference Board, when the Expectations reading falls below 80, it usually presages a recession.
Now, in the chart below, you'll see that when the difference between the Present Situation reading and the Expectations reading rises, it's a very powerful indicator of recession.
People tend to feel better about the present than the future. The future is always more uncertain, and people tend to be a little anxious. So that value (the Expectations reading minus the Present Situation reading) is usually negative, as you can see below.
But when that gap narrows, it usually means consumers are onto something. When the line in this chart rises, it tends to forecast a recession. And right now, it's on the upswing...
You can see we've gone from a difference of negative 80 to one around negative 40. You'll also see that this indicator doesn't have many false recession signals on moves that big.
Lest you think that consumers don't have a direct effect on the stock market, here's some more data for you. The Conference Board said in its recent report...
Consumer buying plans for big-ticket appliances were mixed and plans to buy a smartphone or laptop/PC in the next six months eased. However, on a six-month moving average basis, purchasing plans for homes and new cars improved slightly.
Over the past three months, homebuilder stocks have risen about 20%. And though Apple (AAPL) shares have held up well enough, the company is garnering headlines for disappointing iPhone 16 sales... We'll see how the stock performs when the iPhone maker reports fiscal fourth-quarter earnings in November.
Now, there is a caveat here...
We are in election season. And all candidates, including Kamala Harris and Donald Trump, use pessimism and fear to drum up votes.
If you were to look at the Expectations Index reading over any four-month period, the average change is about 0.46... basically random. (Since these indexes often go up and down, you'd expect a change close to zero over any given period.)
If you look at the change only in election seasons, which we consider July through November, the average change in the Expectations Index is a decline of 1.6. That's a big move down.
In other words, election season may be making people more pessimistic about the future.
We'll have to see how everything plays out when the election is over.
In the meantime, this is when Peter Lynch's model of investing can really work. Pay attention to your own experiences... and invest in what you know.
Go see how many people are out at the mall. Ask the front desk how booked your hotel is. See how many people your Saturday night Uber driver has taken downtown.
Because whatever happens next depends on happy consumers opening their wallets. And right now, the future looks worrisome...
What Our Experts Are Reading and Sharing...
In addition to the American consumer, you need to watch the Chinese government. It just announced its most aggressive stimulus package since the pandemic. It includes increased funding, lower bank reserve requirements, and interest-rate cuts on existing mortgages. You can read more about China's drastic efforts to shore up its economy here.
I'm a sucker for a long podcast. So I love this recent interview between Pulitzer Prize-winning author Daniel Yergin and Dwarkesh Patel on the Dwarkesh Podcast. Patel is known for his four-hour interviews with AI scientists. And Yergin wrote The Prize, one of the best books on the history of oil and energy use. They go deep into the industry on the podcast. I urge you to check it out on Apple Podcasts, Spotify, or YouTube.
I recently sat down for an emergency interview with Stansberry Research's own Bryan Beach. He's an expert in small-cap stocks. And given the Fed's rate-cut announcement last week, the macro case for small-cap stocks looks strong. You can watch the interview – and learn which small-cap plays Bryan thinks are the best right now – here.
New Research in The Stansberry Investor Suite...
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As a Stansberry Investor Suite subscriber, you can read the entire report here.
If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our new special package of research – click here.
Until next week,
Matt Weinschenk
Director of Research
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