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Consumer surveys reveal growing bullish sentiment

by xyonent
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The latest Consumer Survey data from the Federal Reserve Bank of New York contained some interesting data.

“The New York Fed’s latest survey of consumers shows that Expectations that stock prices will rise over the next 12 months have risen from 39% to 41% since last month’s survey. At the same time, inflation expectations have edged down. “Recent consumer sentiment figures have highlighted how certain demographics are thriving while others are not, but with the market near all-time highs, it’s no surprise that people who own stocks are feeling good.” – Yahoo Finance

The chart below shows the year-to-year change in consumer surveys regarding stock price growth: Not surprisingly, with the market rally that has begun in 2022, investors have become increasingly enthusiastic about stocks.

However, Yahoo! said the growing bullish sentiment in its consumer surveys was due to “The Haves and the Have Nots” This statement is understandable when one considers the breakdown of household stock holdings and the finding that the top 10% of households own 85% of stocks.

But rising stock prices have boosted confidence across all age and income groups, according to consumer survey data — not surprising given the constant stream of social and mainstream media coverage of the current bull market.

Furthermore, when we look at the consumer survey data by income bracket, we see that the increase in confidence is most pronounced among the lowest and middle-income brackets.

Given the proliferation of financial markets through trading apps like Robinhood and the rise in commentary on social media, it’s not surprising that lower-income earners are stepping in and trying to cash in. “Get rich quick”

But amid the bullish sentiment, a warning lurks.

Bull Market Warning

To understand the problem, first You will get capital gains.

Capital gains from the market are primarily determined by market capitalization, nominal economic growth, and dividend yields. use John Hussman’s Using this formula, we can mathematically calculate our earnings over the next 10 years as follows:

(1+nominal GDP growth rate)*(normal market cap to GDP ratio / actual market cap to GDP ratio)^(1/10)-1

therefore, if We assume that GDP can sustain 2% annual growth in the future without any recession. So, if The current market capitalization/GDP ratio is stable at 2.0. So, if If the dividend yield remains around 2%, future earnings will be:

(1.02)*(1.2/1.5)^(1/10)-1+.02 = -(1.08%)

But there are a lot of “what ifs” in that assumption. Most importantly, the Fed must assume it can raise inflation to its 2% target, lower current interest rates, and, as noted above, avoid a recession over the next decade.”

Yet despite these important fundamentals, individual investors are once again letting their guard down. As the chart shows, household stock ownership is approaching all-time highs. Historically, such enthusiasm has signaled the peak of more significant market cycles.

If economic growth were to reverse, valuation declines would be extremely detrimental, as was the case during previous peaks when expectations outpaced economic reality.

Bob Farrell once quipped that investors tend to buy more when prices are high and less when prices are low. This is simply a manifestation of investor behavior over the long term. Our colleague Jim Colquitt, Earlier, I made an important observation.

The chart below compares the average investor’s allocation to stocks and the S&P 500’s returns over the next 10 years. As you can see, the data correlates very well, supporting Bob Farrell’s Rule 5. Notice the correlation statistic in the top left of the graph.

Ten-year-forward returns are inverted on the right-hand scale, suggesting that current levels of investors’ household equity allocations will result in future returns back to zero over the next decade.

That’s because reversals occur when investor sentiment becomes extremely bullish or bearish. Sam Stovall, an investment strategist at Standard & Poor’s, once said:

“If everyone is optimistic, who will buy? If everyone is pessimistic, who will sell?”

The only question is, what will ultimately reverse that psychology?

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Enthusiasm fails in reality

Unsurprisingly, the stock market is currently trending higher, especially as expectations for earnings growth rise, with analysts predicting nearly 20% annual growth over the next 18 months.

At the same time, companies undertook large share buyback programs, boosted stock prices by reducing the number of shares outstanding, and reported earnings per share.

But when economic growth slows, profit margins start to reverse and deflation eats into revenue. Profit margins are tied to economic activity.

Profit rates are probably the most mean-reverting metric in finance, and when they don’t, something is seriously wrong with capitalism. If high profits don’t attract competition, then something is wrong with the system and it’s not working properly.” – Jeremy Grantham

Historically, when markets have traded significantly above actual gains, there has always been a mean reversion event that realigns expectations to economic reality.

A lot of issues are likely to arise over the coming months and quarters, especially at a time when economic growth and unemployment are slowing.

Consumer surveys are very bullish on the prospects for continued asset price growth, but sentiment is “Hope” The Fed doesn’t have everything under control. History shows us that the Fed may well not be in control of everything.

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2024/06/18

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