More than a year has passed since Americans began expecting a recession... yet one never showed up.
That expectation was logical. Inflation was soaring, with no end in sight... The Federal Reserve was hiking interest rates... And many consumers were hurting with no hopes of more stimulus.
It was a classic recipe for a recession. It scared just about everyone. But despite all that, employment data hasn't budged. And overall, the economy has done just fine.
The facts are finally starting to filter into folks' minds. That has led to a big increase in consumer confidence. And history shows this is setting up a tailwind for stocks.
Let me explain...
The U.S. economy has taken a wild ride over the past couple of years.
First, 2020 and 2021 began with extreme fear, followed by extreme euphoria. Then 2022 hit. We began to pay the economic price for the massive stimulus in response to the pandemic... And no one knew how bad things would get.
Fortunately, we've avoided the worst-case scenario so far. Inflation is cooling. The recession never showed up. And now, consumers are finally starting to feel a little better.
We can see that collective sigh of relief through the University of Michigan's Consumer Sentiment Index. This data comes from a survey conducted through roughly 600 phone interviews.
The consumer research group asks American households dozens of questions on how they feel about the economy. And it aggregates the answers into a simple index.
This measure hit the lowest level on record last June. But it has been rallying ever since. Take a look...
Consumer confidence remains low, relative to the index's history. But the past three monthly readings are still well off the 2022 bottom. And that recovery has happened at an extreme rate.
Specifically, the index reading jumped 39% in July 2023 versus the year prior. That's the largest year-over-year increase since 1984. Take a look...
The recovery since last year was nothing short of incredible. We've only seen four other larger year-over-year increases. And the most recent one happened nearly four decades ago.
What's more, the index is at 71.2 this month. That's a 42.4% increase from the historical low last year.
Solid results like these tell us a lot about the state of economic sentiment today...
First, folks are finally realizing that the sky isn't falling. It sure seemed like it would last year. But most pieces of economic data have improved since then. And the average Joe is starting to see that.
Second, consumer sentiment still has a long way to go to get back to normal... let alone to a full recovery. We're still well below the index's long-term average of roughly 85. And readings closer to 100 are possible once sentiment fully recovers.
If that happens, it'll mean the economy has kept improving. And, of course, a strengthening economy is a key tailwind for the market.
Put simply, Americans are feeling vastly better about the economy than they were last year. And if their relief turns to excitement, it will only spur on the bull market in stocks.
We can use several tools to "take the temperature" of the economy. One index looks at whether the economy is beating expectations based on a broad spectrum of data – and this year, it has been handily topping Wall Street's forecasts... Learn more here.
A lot of folks are still worried about their finances today. But overall, two key numbers show that American consumers are in a stronger position than one might think. That's important – because consumers drive the U.S. economy... Read more here.