Editor’s Note: In today’s article, Alexander Green shares a contrarian signal that indicates stocks will soon start trading higher…
So now is the perfect opportunity to capitalize on bargain prices.
Like this little-known company Alex discovered that only recently went public. The company is already taking in tens of millions of dollars… and is poised to take in billions of dollars more in the near future. Management even estimates that sales will increase another 33% to 41% this year.
– Madeline St.Clair, Assistant Managing Editor
Here’s a surprising news item…
U.S. households are the most depressed they have ever been since the University of Michigan began running its Consumer Sentiment Index in the 1950s.
Consumers are telling pollsters that this is the worst economy ever.
Worse than when we had stagflation and lines at the gas pump in the 1970s…
Worse than when we had double-digit inflation and sky-high interest rates in the 1980s…
Worse than after 9/11…
Worse than the housing bust, the financial crisis and its aftermath, the Great Recession…
And I don’t buy it. Not for a minute.
Yes, we have the highest inflation in 40 years. The Federal Reserve is taking rates substantially higher. The global supply chain is snarled. There is a brutal war in Ukraine. And investors endured a ruthless bear market in the first half.
But the U.S. economy is growing. The job market is tight. American households and businesses hold record amounts of cash. And corporate profits are rising.
Moreover, inflation has already peaked. (Prices at the pump are already coming down.) The supply chain unkinks a little more every day. And no recession in U.S. history has ever begun with the economy at full employment.
If I had to guess why Americans are so glum, it’s because prices are rising faster than wages, they are afraid the central bank will knock us into a recession, and Joe Biden is governing like Alfred E. Neuman. (“What, me worry?”)
But there is a light at the end of the tunnel. (And, no, it’s not the headlight of an oncoming train.)
The nearly 70-year history of the Consumer Sentiment Index reveals something important.
It’s this: The worse consumer sentiment gets, the better the stock market performs in the months that follow.
You’ll find a near-perfect correlation between consumer negativity and the bottoming of the S&P 500.
Consumer sentiment is one of the best contrarian signals. And it’s not hard to understand why.
How people feel about the economy is based on what just happened in their economic lives or what is happening right now.
It is a lagging indicator.
The stock market, on the other hand, is a leading indicator.
What happened yesterday or last week is ancient history. Instead, investors look ahead and try to divine what the future holds.
While the view is always hazy, they do their best to anticipate what will happen six to nine months from now.
(Beyond that is simply too far out to forecast.)
This year’s sinking market has priced in all the concerns that consumers are currently feeling.
The dominant beliefs are that inflation will increase and the economy will fall into a recession.
But if inflation is going to go even higher, why are interest rates at a paltry 3%? Why is gold under pressure? Why are TIPS – Treasury Inflation-Protected Securities – down this year instead of up?
The bond and gold markets are shouting loud and clear that inflation is set to moderate.
But is the stock market predicting a recession?
It sure looks that way. But as economist Paul Samuelson famously said, “The stock market has forecast nine of the past five recessions.”
Not every market decline portends an economic contraction.
And no U.S. recession has ever begun with the economy at full employment.
If investors are pricing in higher inflation that doesn’t appear and a recession that doesn’t happen, stocks will almost certainly trade sharply higher from here.
And that’s exactly what the Consumer Sentiment Index is indicating.
That doesn’t mean that stocks won’t trade a little lower in the short term.
Or that they will go up in a straight line.
But it does mean that investors should maintain a reasonable allocation to equities – and should actively capitalize on some of the many bargains that have already appeared.