The Stock Market Had a Wonderful Year. It Might Have Been the Only One.

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Despite the pandemic, consumers continue to shell out their pockets even for expensive luxury goods.

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Scott Haynes / Getty Images

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Grief may love company, but it’s getting ridiculous.

If you had to consider only the numbers, you would assume that everyone will have good memories of 2021. jobs were plentiful, Economic growth was the strongest in decades, and stock returns were out of this world. This is the kind of data that would have been observed a few years ago.

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Despite the new year, Americans aren’t celebrating—they’re mostly sad. University of Michigan Consumer Sentiment Index It fell 13% to 70.6 in 2021, the lowest year-end reading since 2008, when the world was hit by the global financial crisis. In contrast to that year, when the S&P 500 index dropped 38%, the index rose more than 27%. This is the biggest stock market gain in a year when sentiment faced a double-digit decline in at least 25 years. It’s that kind of agony to expect from a group of teens at a Cure concert, but it’s hard to blame people for their disappointment.

COVID-19 should have been gone by this point for a long time, or at least until 2021 as we hoped it would. But a combination of vaccine reluctance, virus mutations, and other factors means that not only do we still have the virus, but that the U.S. Year end with record casesAccording to data from the Centers for Disease Control and Prevention, the seven-day average is 277,741—and there’s little sign that the omicron spike will end anytime soon. The disease seems to have become less deadly as it has mutated, making it easier to ignore, although it shouldn’t be.

“The outlook for Omicron remains the same, as cases are breaking records globally, but the lack of [a] The sharp increase in hospitalizations is allowing the stock to rally towards the end of the year,” writes Tom Essay of Sevens Report.

Rising inflation is also affecting Americans. The Federal Reserve finally promised that rising prices would be “temporary.” And yet we see the year-end consumer price index climbing to its fastest annual rate since 1982, and even as the Fed’s chairman Jerome Powell has also said. It’s time to retire the word.

In the latest report from the University of Michigan, a quarter of respondents cited a hit to their standard of living due to inflation. “Expectations of a brief and fleeting price jump have been dashed,” writes Stephen Stanley, chief economist at Amherst Pierpont Securities. “Inflationary pressures on the back of a handful of pandemic reopening categories have increased and intensified.”

Read more Up and Down Wall Street

Still, it is rare to see such a correlation between sentiment and the stock market. Since 1997, there have been 12 years of declining sentiment, during which the S&P 500 remained high. However, the decline in confidence during those years was generally relatively small. The only year before 2020 when confidence declined double digits and the market edged up was in 2007, when the recession had already begun, but the S&P 500 ended up 3%. Never before has sentiment suffered a double-digit decline in two years to see double-digit growth in the S&P 500 in just two years.

This suggests that there is probably a widening gap between what the respondents say and what they will do. Retail sales in November rose 18.2% year over year, while the Labor Department’s most recent quit data was 2.8%, down from a record 3% but still high. Nicolas Kolas, co-founder of Datatrack Research, believes that inflation may not even be the problem it appears to be. Google searches for words like “discount,” “cheap,” and “coupon” are decreasing, not increasing. ,[As] As much as American consumers may think about inflation (and many surveys show that they apparently do), they are not yet responding to higher prices in search of better deals. This is good news for the American corporate income power, especially among large companies that enjoy economies of scale and scope.”

Maybe so, but investors aren’t feeling great about the stock market despite — or because of — three consecutive years of double-digit gains. The latest American Association of Individual Investors sentiment survey shows the bull percentage remained below 45% for the fifth week in a row, despite the S&P 500 holding above its rising 50-day moving average, observes Jason Goefert of Sundial Capital Research Is. When this has happened in the past, the S&P 500 has risen an average of 4.6 percent over the next three months.

But just as consumers’ pessimism isn’t necessarily reflected in their actions, investors are buying stocks despite a gloomy outlook — and that should be good news for the market. “Current low optimism, especially during this time of year, suggests higher prices, given the mostly healthy market environment,” they write.

Just don’t expect it to be easy.

The Fed is, after all, cutting its bond purchases, and the federal-funds futures market is pricing in a more than 50% chance of a rate hike at the Federal Open Market Committee’s March meeting. This is likely to put a dose of volatility in the market. But with interest rates likely to remain below both the rate of inflation and the rate of economic growth, stocks should still have room to be, writes Jefferies strategist Sean Darby, until the cost of credit relative to the US Treasury is met. . too expensive.

,[Nominal] GDP will still be above government bond yields, ensuring that equities outperform their peers, but a watchful eye on credit spreads will be the litmus test for owning a more challenging business model,” he explains.

And if the market isn’t going up? At least investors will have something to be sad about.

Write Ben Levishon at [email protected]

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