Positive Data in Troubling Times

There are plenty of market pundits calling the start of the next great recession. Some have been calling it for years, decades even. And there are many reasons to be negative on the stock market today, ahem inflation. The purpose of this post is to take the other side and share a few reasons the next 12 months may not play out as many fear. Let me preface by saying I don’t have the answers. I am not a financial advisor and this is not investing advice. These are a few more positive data points on stock market outlook.

Consumer Sentiment

The media is all over inflation and I understand why, it’s big and affects everyone. Our family has felt it. It’s hard to stay in front of increasing food, transportation and other expenses right now. The chart below is the Michigan Consumer Sentiment Index. It’s a monthly phone survey of 500 respondents over 50 questions. The survey covers: personal finance, business conditions and buying conditions. Here’s a sample question:

“Would you say that you (and your family living there) are better off or worse off financially than you were a year ago?”

Source: Michigan Consumer Sentiment Index (MCSI) Definition (investopedia.com)

As you can see from the chart below, this sentiment index has not been this low since August 2011. It shows peaks and troughs for the index (blue dots) and corresponding S&P 500 performance over the next 12 months. On average, following the last 8 troughs, the market has risen 25% in the following 12 months. Consumer sentiment is a lagging indicator. Dropping after things have already moved into negative cycles. I have no crystal ball, but if this is a consumer sentiment trough, the next 12 month returns could be nice.


See the meteoric rise in job openings. There appear to be at least twice the typical number of job openings right now going back to 2000. Workers are seeking better jobs, evidenced by the Quits chart. And employers are striving to keep talent in this job market shown by the low Layoffs chart. Workers have an advantage right now. So, even though there is high inflation, we have a mechanism to combat it – seek higher paying jobs.

Market performance during rate hike cycles

This rate hike cycle began in March 2022. Many expect terrible market performance during rate hike cycles. Rate hikes make homes, cars, business expansion all more costly. You’d think this has a major negative effect on the stock market. But the data doesn’t reveal that. It shows ok, not great performance during rate hike cycles – averaging 5.8%. Granted, with inflation above 8% right now, 5.8% is a negative real return. I would have expected more severe negative market performance during these cycles:

What’s the Alternative?

Fund flows impact prices. What will investors do as they open quarterly statements with terrible bond performance? It’s one thing to see negative equity returns. But when you see big negative fixed income returns – 10% negative YTD on corporate bonds. Which should stabilize your equity allocation, what will you do? Economists predict more rate hikes this year. This could mean further bond fund declines. Many might reach for equity performance, providing unexpected demand for stocks.

Stocks priced close to normal

The S&P 500 has averaged over 20% the last few years, driving up the Price to Earnings (PE ratio). It shows how expensive a stock (or index of stocks) is priced relative to its annual earnings. To calculate PE ratio:

Price (number of shares outstanding x price per share) /

Net earnings (either forward estimate or backward 12 months)

For the median S&P 500 company, the PE ratio has averaged 16.0 over the last 25 years. Today it sits at 17.1 – close to normal. 6 months ago, this was over 20.0. Stocks have come more in line with historical valuations. Not cheap, but no longer severely overpriced like the end of 2021.

We approach mid 2022. A tough year for investors with only commodities performing positive. See Stay the Course for more about this. There is a lot of negative sentiment right now. There’s always some negative noise from perma-bears, but this year it’s deafening. And Americans are feeling the pinch with rising inflation. No doubt these are challenging times. Buckle up for the 2nd half of 2022.

Leave a Comment