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Earlier this week I wrote that on balance economic and company data seemed to be more positive than negative. Also noted in that post was the fact the services segment of the economy has become a significantly larger component than the manufacturing segment. Certainly there are headwinds that seem mostly associated with the trade and tariff issues and this was top of mind in the just completed week. On the day President Trump announced that more tariffs are likely to be imposed on September 1, the market swung 600 points. On a percentage basis though, the market was up 1% that day and fell to down 1%. Much of the financial commentary from the media seemed focused on the point swings in the Dow Jones Index itself. On a percentage basis not a significant change. As the below chart shows, the S&P 500 Index remains up 16.96% this year on a price only basis and is only down 3.74% from its high. For the week the market was down just 3.1%.


I get it that there is no free lunch when it comes to tariffs and the increase in cost associated with tariffs likely gets passed onto the purchasers of tariff impacted products at some point. Yet, inflation has remained subdued and below the Fed's 2% target as seen below.


Just as the services sector carries more weight in the economy, the consumer continues to account for a larger portion of GDP. Today the consumer (PCE) is nearly 70% of GDP. In the Q2 2019 GDP Advanced estimate report, the consumption component added 2.85 percentage points. The biggest detractor from GDP was gross private domestic investment at -1.00 percentage point. In other words, the consumer is actually acting as though they are in fairly good shape in spite of the trade and tariff rhetoric.


The Conference Board's Consumer Confidence Index report last Tuesday was a near record 135.7. The high within the consensus range was 128 and the report exceeded the most optimistic of the expectations. Econoday noted in their report on the confidence results,
"In assessments on the 6-month outlook, consumers see improving business conditions and in the breakdowns for employment and income all the readings show increasing strength especially a 4.2 percentage point rise to a strong 24.7% for those who see their income rising. Much of this gain for income prospects is tied to the jobs market, but the stock market is also a positive factor as bulls surged more than 8 percentage points in the month to 41.6% while the proportion of bears sank 8 points to 22.4%."

So with a confident consumer it is worthwhile evaluating the sentiment of investors. In that regard bullish investor sentiment reported by The American Association of Individual Investors increased almost 7 percentage points to 38.4%. This is essentially equal to the long run average of the bullish sentiment reading. The reading is neither overly bullish nor overly pessimistic. And the sentiment readings are most actionable at their extremes.


The Conference Board's consumer confidence survey also evaluates the consumers' expectations about stock prices. As the below chart shows, 41.6% of those surveyed see stock prices higher in the next twelve months. This is above the longer term average but not at an extreme either.


And a final look at one other sentiment measure, the Fear & Greed Index reported by CNNBusiness. This index is now back in the Fear range after having spent most of the last month in the Greed range.


As I have noted in past posts, the sentiment measures are contrarian ones and most actionable at their extremes. None of the measures are at extreme bullishness levels which would suggest a market correction is probable, all else being equal. The current sentiment measures are neutral to leaning bearish.

For investors, pullbacks and corrections are a normal part of the market cycle. In a Standard & Poor's article ($$) from a couple of years ago, it was noted that pullbacks (a decline of 5% - 9.9%) occur every year on average but only take about 2 months to recover the ground lost in the decline. This study adds some insight into the buy the dip mentality that seems to be a common theme these past ten or so years.

The market's have had a favorable year in 2019, yet much of the advance is simply a recovery of the market decline in the 4th quarter of 2018. The below chart shows a few market segments and all but the S&P 500 remain below the level reached on 9/28/2018.


If the economy continues to exhibit growth, which I believe to be likely at this point in time, stock returns are likely to be favorable in the year ahead as well. However, declines and pullbacks are a normal part of bull markets and these should be expected. August and September tend to be seasonally weak periods, so a higher level of volatility near term would not be unexpected.

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