Capital Markets Update #33

One of the more perplexing quandaries facing market watchers and economists alike is the discernable recent break in predictive efficacy associated with broader consumer sentiment and confidence indicators when evaluating consumer activity.  This break in sentiment vs data has become increasingly apparent since 2020.  Furthermore, this same dichotomy has played out across multiple forms of survey-based information gathering efforts acr – look at polls versus election results, for that matter.  Some economic examples:  Consumer confidence has plummeted over the last five years while the home ownership rate has remained stable and exposure to the stock market has risen.  Similarly, consumer sentiment has nosedived while median consumer net worth has skyrocketed and household debt payments as a percent of disposable income hovers around an all-time low.  While cost of living remains the hot topic throughout the current political cycle, both consumer debt to GDP and the unemployment rate are at or near all-time lows.  The overall savings rate is down, but, according to Bank of America, cash in checking accounts remains materially above inflation adjusted pre-covid levels while the stock market is up 230% since 2020.  Speaking of the stock market, the AAII surveys bull-bear sentiment amongst investors and has recorded an overwhelmingly negative reading since January 2025.  The S&P 500 has gained 28% over the period. 

When you take into account the sum total of this data, both survey and empirical, one can’t help but question what’s changed?  Why are Americans richer than ever before, more employed than ever before, experiencing near all-time low rates of personal bankruptcy and paying near the lowest amount in debt service (mortgage, credit cards, personal loans) as a percent of income ever…while hating the entire experience?  You probably need to be an MD to formulate an educated answer, likely with a doctorate in psychology, as it appears this divergence can’t be squared with math or data alone.  Which helps paint the ultimate picture here – investors, business owners and market divinators now look firmly beyond surveys for sources of actionable information.  Interestingly, not all “sentiment” indicators inaccurately represent the “signal.”   For instance, non-survey-based sentiment indicators, including the VIX (stocks) and MOVE (bonds) indices, are exceptionally efficacious.  Why?  Because they track what people do, not what they say.  The Put/Call relationship provides a similar view on investor perspectives, especially now that retail investors account for somewhere between 20% - 45% of daily options volume, according to MEMX. 

In other exciting news for all regular readers, we have a new data source to evaluate consumer spending!  The CNBC / Affinity Solutions monthly consumer sales report is a new retail sales monitor which aggregates actual transaction activity from a panel of 120 million debit and credit cards annually.  We’re talking about mapping ~$40 billion in monthly gross spending, or about $480 billion annually, which represents an excellent cross-section of spending data.  Its worth noting this CNBC / Affinity data lacks the full extent of consumer understanding that you’d get out of say Bank of America, which evaluates unemployment vs regular income, changes in after-tax wages, spending habits, cash balances, loans, everything.  But this CNBC / Affinity data appears to be the best pure-play retail sales dataset going.  According to this dataset, spending rose 4.05% YoY which is in line with 4.50% YoY growth out of BofA.  On a core basis, consumer spending rose 3.75% YoY, bolstered by solid performance across many sectors including 8.4% YoY grown in electronics / appliances, 5.4% growth in food / drinks away from home, 5.4% in miscellaneous retail, 2.2% in clothing, etc.   On a real basis, after stripping out CPI inflation, we saw about 1.0% - 1.5% growth in consumer activity over the trailing 12 months.   Pretty darn solid and undoubtedly not indicative of any perceptible weakness in the US consumer overall.

Which takes us back to the aforementioned quandary.  According to an August Gallup poll, only 19% of Americans view current economic conditions as good, while 45% think the economy is functioning poorly.  We just finished Plato’s Republic.  One philosophical truth, according to Plato, is that assumptions are, by definition, not truths.  Accordingly, our assumption as to why Americans are dissatisfied with their present lives while experiencing a period of unprecedented abundance would be, by Plato’s definition, worthless as well.  So, we’ll focus on monitoring the trend. 

That said, questions remain.  How do Americans become happier and more capable of appreciating and enjoying their lives?  Alternatively, what is it that drags so many Americans down into despair?   Much of this is a mental framework and that’s why we love the following quote from Michael Jordan:  “I've missed more than 9,000 shots in my career. I've lost almost 300 games. 26 times I've been trusted to take the game winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed.”