The Market Is Near a Record. Confidence Is Near a Low.

Friday delivered both. The survey that measured the gloom also explains who is feeling it.

The Close

Friday rescued a jumpy week. The Dow rose 423.31 points, or 0.83%, to 51,654.95. The S&P 500 added 46.18 to 7,811.54, up 0.59% and within a tenth of a percent of the record it set on October 6. The Nasdaq Composite gained 0.64%. For the week the Dow finished up 1.15% and the S&P up 0.95% — though the small-cap Russell 2000 ended the week down 0.91%.

That rally ran straight past the morning's economic release. The University of Michigan's preliminary October reading of consumer sentiment came in at 46.3, down from 48.1 in September and the weakest in five months.

One Big Thing

Two numbers landed within hours of each other on Friday, and they disagree. Stocks sit a hair below an all-time high. Consumer sentiment sits near the bottom of its recent range. People usually treat that as a contradiction to be resolved. It isn't. Both measurements are correct, and the survey itself tells you why they differ.

Look inside the Michigan numbers. The headline fell 13.6% from a year ago. But the sub-index covering how people judge conditions right now dropped 23.7% over the same stretch, from 58.6 to 44.7. Expectations for the year ahead barely moved by comparison, down 6.0%. Americans are not forecasting disaster. They are unhappy with what things cost today.

Joanne Hsu, who runs the survey, put it plainly: “Frustration over cost-of-living continues to mount.” Buying plans for big-ticket items fell sharply, which she attributed to high prices and borrowing costs. Year-ahead inflation expectations rose to 4.7% and the long-run measure to 3.5%, both up for a second straight month.

The steepest declines came from consumers with the smallest stock portfolios. The survey says so explicitly.

That line is the whole explanation. A record stock market is a windfall for the households that own a meaningful amount of stock and almost nothing to the households that don't. The two readings aren't measuring the same people.

The Chart That Explains It

The gloom is concentrated in the present tense. How people rate conditions today has fallen nearly four times as far as what they expect from the year ahead. That is the signature of a price problem, not a fear of recession.

The Deeper Read

An index is not an economy. The S&P 500 is a size-weighted claim on a few hundred of the largest companies on earth, and its direction is set mostly by a handful of enormous firms whose customers are other corporations and whose revenues are global. Household mood in Ohio does not move that needle much.

Last week drew the line for you. While the Dow gained 1.15% and the S&P 0.95%, the Russell 2000 — smaller companies, overwhelmingly domestic, far more dependent on American shoppers and on floating-rate debt — finished down 0.91%. One week, two directions, and the split falls exactly where the sentiment survey said it would.

The squeeze on those households is measurable without any survey. Freddie Mac has the 30-year fixed mortgage at 7.40%, up a full point from a year ago. Brent crude spent the week above $100 a barrel. Neither of those shows up in an index level, and both show up in a monthly budget. When someone asks how the economy is doing, the honest answer now has to start with a question: whose?

What This Means For You

Resist the urge to trade a mood. Sentiment surveys record how people feel, and feelings have a long history of being poor instructions for a portfolio — in both directions. A grim reading is not a sell signal any more than a record close is a buy signal.

One component does deserve your attention, and it is the one the Fed watches. Expected inflation rose again, to 4.7% for the year ahead and 3.5% over the long run. Central bankers care about those numbers because expectations have a way of becoming self-fulfilling through wages and prices — and this Fed has already said it may raise rates again before year end.

This week supplies harder evidence. September inflation data arrives Wednesday, October 14, the big banks begin reporting third-quarter results, and the Fed meets October 27–28. Michigan's final October reading follows on the 23rd. If you watch one line in it, make it expected inflation rather than the headline — that is the figure with a policy consequence attached to it.

— Anthony

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