Confidence Catches Up

Sentiment data is beginning to match relatively strong "hard" economic data.

U.S. consumer confidence has finally begun to catch up with relatively strong "hard" signals such as jobs and inflation data. This is potentially positive news for the stock market, where we expect a continued broadening-out in market breadth. However, the fixed income market is likely to experience continued volatility for similar reasons: The resilience of the economy is complicating the Federal Reserve's timing on potential interest rate cuts, which is sending mixed signals to the markets.

Meanwhile, the unpredictability of Chinese government policy is adding to uncertainty in its stock market. Measures to revive the Chinese economy have been a slow drip of policies so far, and have not been sufficient to support a sustainable turnaround in Chinese consumer confidence, which remains low due to weakness in the property market.

U.S. stocks and economy: Revived confidence

A key theme over the past year has been the strong disconnect between soft and hard data. Soft data—which are survey-based—measure attitudes and are qualitative in nature. Conversely, hard data are quantitative and represent concrete data points. Understanding the difference between both has been key to comprehending why the current economic cycle has looked so different relative to others.

On the sentiment side, consumers didn't feel cheery for most of the past year, but that has started to change lately. As shown in the chart below, the Consumer Confidence Index (CCI) from The Conference Board and the Consumer Sentiment Index (CSI) from the University of Michigan have turned sharply higher over the past couple of months. It's worth noting that the CSI experienced a much larger drop from its pre-pandemic heights, given that the index is driven relatively more by inflation dynamics. Conversely, the CCI is more tied to the health of the labor market.

Attitudinal revival