Amidst the current turmoil in the banking sector, including the 2nd and 3rd most significant bank failures in U.S. history, it’s surprising to see the Conference Board’s Consumer Confidence improving this month. The headline figure reached 104.5, exceeding expectations by over three points. Nevertheless, investors continue to look on the dark side regarding the stock market.
The Conference Board’s Investor Confidence Index is a powerful indicator of investors’ sentiment in the U.S. stock market. The index is derived from a survey of investors’ attitudes toward the stock market and measures their confidence in the market’s direction over the next twelve months. When the index is positive, investors are optimistic about the market’s prospects, while a negative index suggests that investors are pessimistic. In addition to showing fundamental market perception, it is also a useful contrarian indicator, as individuals can stay too entrenched in their views for too long.
In the most recent report, the index tracking the percentage of consumers anticipating higher stock prices fell from a ten-month peak of 31.3% to 29.5%, while the rate predicting lower stock prices rose from 32.4% to 36.8%. The gap between consumers expecting higher stock prices and those expecting lower prices expanded to -7.3% in March, marking the 15th consecutive month in which negative sentiment towards the stock market outweighed positive sentiment.
The current 15-month streak is the second longest on record, only behind the 18-month streak from November 2007 to April 2009. The next closest streaks in total duration were the nine months ending in February 2012 and January 2013. The two nine-month streaks began after significant equity declines but continued even as the market started to recover. The streak from November 2007 to April 2009 was a different case. Like the current streak, stocks kept declining while sentiment remained negative, and it wasn’t until a month after the market’s lowest point in 2009 that opinions turned positive.
During the Financial Crisis streak, when it reached the 15-month mark, the ultimate bear market lows were yet to come, but most of the damage had already occurred. Although the path was not smooth, the S&P 500 increased 30% over the following year. Moreover, examining the S&P 500’s performance in the year after each of the previous streaks lasting nine or more months, the index’s performance was consistently positive, with gains ranging from 11% to 36%.
As is said, while history does not repeat itself, it often rhymes. And while no one knows where the market will go next, extended periods of negative sentiment towards equities can create pent-up demand for stocks once the pessimism eventually subsides.
Economy
- U.S. equity markets closed the quarter on a high note for the week ending March 31, with the S&P 500 up +3.5%, the Nasdaq up +3.4%, and the small-cap Russell 2000 up +3.9%. It was a light news week with a good ending on Friday as the PCE price index showed cooling inflation.
- In February, the U.S. saw a +0.3% increase in Core PCE prices, which do not include food and energy. This is lower than the previous month’s upwardly revised +0.5% increase and below the anticipated +0.4% increase. The annual rate, which is the Federal Reserve’s preferred measure of inflation, rose by +4.6%, marking the lowest increase in 15 months. This figure also falls below market predictions of +4.7%, leading to speculation that the Fed’s rate-tightening cycle may soon end as it appears that inflation has peaked.
- In January 2023, the S&P CoreLogic Case-Shiller 20-city home price index in the U.S. increased by +2.5% YoY, the smallest rise since November 2019, following a +4.6% increase in December. Home prices fell for the seventh consecutive month (-0.6%), with 19 cities experiencing a decrease and the West Coast showing continued weakness in home prices.
- During the week ended March 24, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances remained almost steady and decreased by -3 basis points to 6.45%, marking a third straight week of decline and reaching the lowest level since mid-February.
- In February, pending home sales in the U.S. increased by +0.8% month-over-month, reaching the highest level since August, surpassing market expectations of a -2.3% drop and following an +8.1% rise in January. Sales grew for the third consecutive month, indicating that the housing sector’s contraction may end.
Stocks
- U.S. equities were in positive territory. Energy and Consumer Discretionary were the top performers, while Healthcare and Communication Services lagged. Value stocks led growth stocks and small caps beat large caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield increased 11 basis points to 3.49% during the week.
- Global bond markets were in negative territory this week.
- High yield bonds led for the week, followed by corporate bonds and government bonds.
