It seems that the crowd is locked in a perennial state of "irrational pessimism." Even though economic data releases and corporate earnings continue to suggest that the US clearly isn't on the verge of entering a recession, consumer confidence is more or less at the same level as it was in recessions occurring prior to the Global Financial Crisis in 2008. There is clearly a gap between what is really happening in the economy and what consumers perceive to be occurring. This "expectations vs. reality gap" is what we and our clients are seeking to profit from.
Yesterday US GDP data was released. It came in ahead of expectations at a modest 3%. If one looks at GDP stats over the last 30 years this could be regarded as a "middle of the road" growth rate. Given this you could be forgiven for thinking that consumer confidence should also be "middle of the road," certainly not at levels that reflects a high degree of pessimism.
But this isn't the case. As per the recent released Conference Board Index, consumer confidence, although at a 12 month high, is still more or less at the same level as it was in the early 1980s and 1990s, when the US was gripped in two significant recessions.
Conference Board Consumer Confidence Index
What is the significance of this divergence? Well it is yet more confirmation that equities are still very cheap. The price level of an equity market essentially reflects consumers' confidence (or lack thereof) in the sustainability of future cashflows/earnings. With consumer confidence so low it should perhaps come as no surprise why there is still a 5% differential between the earnings yield of the S&P 500 and the US 10yr!
It is said that bull markets begin in pessimism, grow in skepticism, mature in optimism, and die in euphoria. And that bull markets creep up on you when you least expect it. With such strong fundamentals and very low expectations in the sustainability of those fundamentals, I think we may well see major market equity indices continue to surprise to the upside over the coming months. As I have been saying for the last 3 years - continue to see any weakness in equities, namely of the large cap US variety, as an opportunity to buy.