Consumer Sentiment Improving

Stocks opened mixed this morning (Dow +100 points; SPX flat; Nasdaq -.9%). The VIX Index, which gauges fear among investors, rose to 21 from 18 this month. But while expected volatility may be rising, the VIX is nowhere near its 2022 average. Bonds continue to sell off as interest rates creep higher. Bankrate’s average 30-year fixed mortgage rate, which had been trending lower since November, is now back up to 6.6%. We’re seeing a bit of a reckoning in the bond market, which until this month assumed that the economy and inflation would soften up quickly, leading to lower rates in the near future. Investors are rethinking that assumption.

The University of Michigan’s monthly poll of consumers revealed rising optimism. Sentiment readings for both current and future economic conditions were significantly better than expected. So while sentiment is still at relatively low levels, this report suggests consumers don’t see recession as imminent. At the same time, while inflation is obviously decelerating, consumers don’t expect it to fall back to the Federal Reserve’s 2% target. Surveys point to an average of 3% over the long run (5-10 years). We agree, and believe that at some point the Fed will have to raise its target to 3%.

About 350 of the S&P 500 companies have already reported fourth quarter results and we’re seeing a clear trend: slowing growth and smaller profit margins. High inflation, rising interest rates and changing consumer spending patterns are taking a toll. According to Zacks Investment Research, aggregate sales were up 5.7% from a year ago, but profits fell 6.7%. At the moment, Wall Street strategists expect first quarter earnings to be down 7.5%, but foresee a recovery thereafter.