It Was the Best of Times, It Was the Worst of Times

The Index of Consumer Sentiment was developed at the University of Michigan and has been used since the 1960s to assess the general mood of everyday consumers. Each month, a series of 50 questions are posed to 500 different individuals. The questions cover topics such as personal finances, business conditions, and buying conditions. Here are a few examples of questions that are asked…

• Would you say your household is doing better or worse financially than a year ago?
• A year from now, do you think you and your household will be better financially, worse, or about the same as you are now?
• Over the next year, how do you feel about interest rates — do you think they will go up, down, or remain level?
• Over the next year, how do you feel about prices — do you think they will go up, down, or remain level?

Last week, we learned that this indicator hit its lowest recorded level ever of 50.2. Lowest ever. Consumers are as pessimistic as they have ever been on our economy, and 70% of our economy is consumer spending. Dickens’ opening line from A Tale of Two Cities (which we’ve referenced before) again seems apropos for the moment. According to survey director Joanne Hsu…

“While consumers appear confident about their own finances, they continue to voice strong concerns about the economy around them. Feelings of personal stability may have supported resilience in spending thus far, but persistently negative views of the economy may come to dominate personal factors in influencing consumer behavior in the future, particularly if global factors, like supply chain issues, or income prospects worsen….46% of consumers attributed their negative views to inflation…and half of all consumers spontaneously mentioned gas prices during their interviews.”

The prior lowest sentiment reading was in the middle of the 1980 recession, a year in which inflation ran at 13.5%. History doesn’t repeat itself, but in this instance, it does rhyme.

High inflation is a killer, and while there are many different inputs that go into the Consumer Price Index, the cause of high inflation remains the same…too much money chasing too few goods. In response to the pandemic, governments around the world temporarily closed large parts of the economy, and at the same time passed out trillions of dollars of stimulus money to keep individuals and businesses afloat while the economy remained largely closed. Central banks kept interest rates low in order to help stimulate that demand, and the money started flowing everywhere. At first it was all fun and games. It led to a runup in prices across many asset classes in both public and private markets. Eventually, though, global supply chains decades in the making became broken while demand was reaching historical highs. This helped lead to higher and higher prices and relative scarcity in many goods and services, which has brought us to where we are today. Asset prices have fallen (or begun to fall), and inflation is above 8%.

It is still too early to definitively say what the long-term consequences (good and bad) of the pandemic-era will be. Slowly but surely, though, we are starting to paint the picture of what our post pandemic world is going to look like. Over the next few emails, we will share our thoughts on a myriad of pandemic related economic topics, and what it may mean for us as investors and as consumers. As always, please let us know if there is anything we can do for you.