While Trump’s impeachment is taking up headlines, the more significant story for investors is what’s happening with sentiment
What if I told you Trump’s impeachment wasn’t the biggest news of the day?
The reality is that for the investment markets, it’s not.
The impeachment, which we’ll cover in a moment, is just another straw that’s piling up on the camel’s back. And in this case, that camel is the U.S. consumer, who’s been propping up the economy, and by extension, the stock market.
So, what’s the real story then, if it’s not Trump?
Yesterday, the Conference Board released September’s Consumer Confidence Index data. And it’s pointing toward a marked decrease in consumer confidence.
This is important.
How consumers feel about future economic and investment prospects is what drives them to open their wallets — or not.
It’s often a self-reinforcing loop. Regardless of what economic conditions actually are, if consumers perceive things are deteriorating, they’ll hold tighter to their money. This, in turn, will have a very real negative impact on exact economic fundamentals many consumers are watching, which will only reinforce the fearful sentiment, leading to even less spending, which further damages the economy, and so on.
Yesterday’s news highlights a significant slip in the confidence level of the U.S. consumer.
So, in today’s Digest, let’s briefly cover Trump’s impeachment, but then rotate to the bigger investment story — the condition of consumer sentiment, and what that might be saying about the market in the coming months.
***Yesterday, we learned that House Speaker Nancy Pelosi is launching a formal impeachment process against President Trump
This was a sudden move, especially given how Pelosi has been resisting democratic calls for impeachment over previous months.
The news that led to her change of position was the disclosure that President Trump allegedly had pressured Ukrainian President, Volodymyr Zelensky, to investigate Joe Biden’s son.
Trump claims Biden’s son was mentioned in the context of fighting “corruption” in the country. The impeachment position is that Trump used his presidential influence to pressure Zelensky to investigate a domestic political opponent, using nearly $400 million in military aid to Ukraine as a bargaining chip.
As I write Wednesday morning, Trump has released a transcript of the call. It shows Trump seeking a review of Biden family dealings in Ukraine. But Trump doesn’t make a direct link between the halted U.S. aid and an investigation into Biden’s son.
This alleged link is a large part of the impeachment decision.
As I write, markets are not only taking the news in stride, they’re pushing higher. This is based on Trump’s comments to reports at the United Nations that a trade deal with China could come sooner “than you think.”
All three major indexes are up, with the Dow leading the way, up 157 points.
While it’s certainly possible the impeachment story turns into a much bigger deal in the coming days, as of now, its impact is muted.
***The bigger news for investors is yesterday’s Consumer Confidence reading
The Conference Board released September’s Consumer Confidence Index data, revealing a sharp decline to 125.1 That’s down from August’s 134.2. For greater context, the reading was expected to come in at 133.5. It’s the largest drop since last January.
This erosion of consumer sentiment is a problem. After all, as we noted at the top of this Digest, sentiment is what drives consumers to spend money, which keeps our economy healthy. When fear takes hold of the consumer, spending slows with damaging ripple effects. It’s like oil being drained out of an engine — it begins grinding and eventually seizes.
That’s what we want to avoid, but frankly, the media isn’t helping.
It was just yesterday — before Trump’s impeachment news — that Neil George made this point in a timely update to his Profitable Investing subscribers.
From Neil:
One of my concerns about the stock market is what I perceive to be an increasing amount of negative spin on economic news. Any time an economic data point is released, like the monthly jobs report, I hear some news outlets call the number half-empty, while others call it half-full …
My fear is that negative economic commentary might make consumers, who run about 70% of the U.S. economy, pessimistic. That potential pessimism may slow down their spending, which could inspire a self-perpetuated downward spiral.
At the end of the day, it’s all-but-impossible to separate investor sentiment from market prices.
For example, in a roaring bull market, it doesn’t matter if market valuations are at nosebleed levels. Euphoric investor sentiment will often continue to drive prices higher.
On the flip side, in a dismal bear market, even once-in-a-decade, rock-bottom stock-prices won’t always lure investors back into the market if the sentiment is fearful.
The point is simple — what investors believe is hugely influential on the market direction.
And as Neil points out, an increasing volume of negative spin from the news outlets could end up having a very real impact on the economy and the markets.
***But in an effort to not join the “doom and gloom” press, let’s find the silver lining here
You see, while too much investor fear is a bad thing, “moderate” investor fear could actually have a positive effect on the markets.
We wrote about this back in mid-August. From that Digest:
I imagine this as a balloon inflating. If you continually pump the balloon full of air, at some point it’s going to pop.
Similarly, if the investment markets are continually flooded with new capital without ever taking a breather, eventually some investors will recognize the lofty valuations and the accumulated gains, so they’ll sell, and this will lead to a fast, panicky “pop” that will burst the market bubble.
Back to the balloon … What if the person filling the balloon was scared of it popping? So, as it became increasingly inflated, he’d let some air escape from time-to-time? Obviously, that balloon won’t pop nearly as quickly in that case.
(News events that lead to selloffs) are the equivalent of letting some air out of the balloon. Investor fear, which leads to sell-offs, takes pressure off the markets.
Some fear prevents “irrational exuberance,” which is often a sign of the final days of a bull market.
In Neil’s update yesterday, he referenced a quote by Sir John Templeton that’s helpful to remember in times like this:
Bull markets are born in pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
By the way, a reminder that Neil just released his new book, called Income for Life: 65 Income Streams ANYONE Can Collect. It contains both high-yielding investment ideas, as well as interesting “side hustle” opportunities — all to help investors generate more income immediately. Click here to learn more.
***Plus, looking ahead, historically, the 4th quarter of the year is a bullish quarter for the stock markets
Last year’s 4th quarter was brutal. As I’m sure you remember, the S&P, Dow, and Nasdaq plunged roughly 14%, 12%, and 17%, respectively.
Despite this, historically, this last quarter of the year is usually a good one for stocks.
Two years ago, Forbes ran a piece that detailed historical 4th quarter performance. It looked at three decades worth of market data. Sure, there are some ugly 4th quarters, but in large, if the averages play out, we’re in for some nice gains coming our way over the next three months.
The chart below from the Barron’s piece shows the breakdown by years. The short takeaway is that the average 4th quarter return from 1988 through 2017 was 5.3%. Even better, there were 7 different years when markets surged more than 10%.
As to why the 4th quarter is usually good for stocks, many people point toward the fabled “Santa Claus Rally” — basically, the idea that positive emotions surrounding the holidays drives investor optimism, pushing markets higher.
Here again, note the power of “sentiment,” only in this case, it’s optimistic sentiment that results in a positive impact on market prices.
As we move into the 4th quarter and head toward the end of the year, keep your eye on sentiment. That’s the real canary in the coal mine.
Have a good evening,
Jeff Remsburg
