A Change of Pace

It has been a while...

After a volatile few weeks in the market, things were calm today.

The major U.S. indexes were "mixed" with the tech-heavy Nasdaq Composite Index leading all movers, up 0.5%. The U.S. benchmark S&P 500 and Dow Jones Industrial Average were little changed, and the small-cap Russell 2000 Index was down only 0.6%.

And for the first time since February 20, the day after the S&P 500 hit a new all-time high, the CBOE Volatility Index ("VIX") – considered by some to be the market's "fear gauge" – traded an entire day below a reading of 18. That's notable.

The VIX measures the implied volatility of the S&P 500 over the next month. Its value is essentially an aggregate of a wide range of S&P 500 Index options, based on bullish or bearish bets – call and put options – expiring in roughly 30 days. The higher the index, the more volatility traders expect.

On March 11, the VIX reached a fairly high level of nearly 30, its highest reading since last August. But with this gauge trending to a new one-month low, combined with a run-of-the-mill day for the major U.S. indexes, it appears widespread investor fear has dissipated for now.

Plus, for a second straight day, Mr. Market brushed off substantially bad news. Yesterday, as we wrote, it was a sign of contraction in U.S. manufacturing this month. Today, we're not talking about the White House group chat read 'round the world, but something else...

Consumer confidence just hit a four-year low...

This morning, the Conference Board's Consumer Confidence Survey showed that folks' outlook on the U.S. economy declined for the fourth straight month. The index now sits at its lowest level since January 2021. It's down seven points since last month to a reading of around 93.

Nearly every component of the index fell.

Those surveyed now see inflation hitting 6.2% over the next 12 months, up from 5.8% in February. Their outlook on business conditions and the labor market over the next six months also fell, with 16.7% of folks expecting more jobs to be available, down from 18.8% in February.

This is the continuation of a trend...

In recent months, we've seen consumer surveys from both the Conference Board and University of Michigan show that Americans are less confident in the economy. Tariffs are adding uncertainty to the environment. Meanwhile, the job market is lukewarm, and inflation is still a big concern.

As Stansberry Research senior analyst Brett Eversole wrote in the free DailyWealth newsletter today, pending U.S. home sales also just a hit a new all-time low. The U.S. housing market is frozen with high prices and mortgage rates above 6%.

described today's consumer outlook in the most recent issue of This Week on Wall Street...

Consumer sentiment has turned abysmal. Folks are worried about business conditions and losing their jobs at a level we haven't seen in decades. (Check out this roundup on consumer pessimism from the Apollo Academy's chief economist, Torsten Sløk.)

Not everyone is seeing the signs, though.

The Federal Reserve isn't worried...

During his press conference last week, Fed Chair Jerome Powell downplayed the importance of these trends. Instead, the Fed is focused on data that shows consumer spending is still going strong.

Powell also highlighted that three-year and five-year inflation rates haven't moved much, as measured by the New York Fed's survey of consumer expectations.

That may be true, but these longer-term rates both remain elevated at 3%, well above the Fed's target of 2% annual inflation. And while the Fed might not see consumer surveys as an issue yet, sour sentiment about the economy could become a self-fulfilling prophecy.

Higher inflation expectations might signal that folks are more willing to pull back on spending because of economic uncertainty – hurting overall growth. Continued higher-than-average inflation could also drive wages higher.

We're willing to put more credibility in consumer surveys than the Fed, especially when the sentiment is backed up by corporate earnings expectations.

A disconnect with Main Street...

Last week, footwear giant Nike (NKE) said it expects sales to take a huge hit – by a percentage in the mid-teens – in the current quarter. Elsewhere, American Airlines (AAL), Delta Air Lines (DAL), and Southwest Airlines (LUV) all lowered their sales forecasts on weaker demand to start 2025.

We're also seeing softer expectations and results from companies that typically thrive when folks are more cautious with their spending...

In an earnings call earlier this month, Dollar General (DG) CEO Todd Vasos said that customers "only have enough money for basic essentials." And he doesn't expect that trend to change anytime soon.

Big-box retailer Walmart (WMT) has seen an increase in shopping trips from higher-income customers and noted that folks are pulling back on discretionary purchases in favor of must-haves.

Even convenience stores are seeing a drop-off in spending on things like chips and cigarettes, according to the Wall Street Journal and Fortune. If folks are pulling back on spending on "addictive" products like junk food and tobacco, it's a bad sign for the economy.

All of this aligns with what the consumer-confidence surveys are seeing, rather than the data the Fed is using to make decisions.

If inflation remains sticky and folks continue to pull back on spending, "stagflation" could be a word you hear much more often... And the Fed will have a problem on its hands. The central bank is already forecasting lower growth and higher inflation for 2025. A drop-off in consumer spending will only make the dynamic worse.

If that happens, the Fed's likely next move – lowering interest rates this year – might stoke more inflation. Or if the central bank continues with its cut "pause," the economy could keep taking a turn for the worse. Neither outcome is ideal.

So stocks may have bounced back from their correction earlier this month, but the market and economy aren't out of the woods just yet.