Consumer Sentiment Plunge Could “Kill” Bull Market

Stocks are slightly down today as the S&P retreats from its all-time high. The Dow’s dropping, too, while the Nasdaq Composite trades for a slight gain.

It’s a complete turnaround from this morning’s pre-market action, in which only the tech-heavy Nasdaq Composite was falling after investors learned that the U.S. and China had resumed trade talks.

The market opened higher in response to the news, but promptly sunk in a matter of minutes, seemingly unimpressed by a statement from the Office of the U.S. Trade Representative.

“Both sides see progress and are committed to taking the steps necessary to ensure the success of the agreement,” the statement read.

Ambassador Robert Lighthizer and Treasury Secretary Steven Mnuchin participated in a regularly scheduled call with China’s Vice Premier Liu He. On the call, they discussed how the two countries would implement the previously agreed upon Phase One trade deal.

Most notably, China says it will “ensure greater protection for intellectual property rights,” which was one of the key issues in the years-long trade war.

Neither side has yet to release any specifics concerning how that will actually happen.

But to many analysts, investors are focused on more domestic problems, like the ongoing coronavirus pandemic and the state of the U.S. economy.

“Equity investors continue to express cautious optimism on the direction of the economy and progress with the virus,” Mark Hackett, chief of investment research at Nationwide, said.

“Investor sentiment has shifted, with substantial optimism now embedded into the equity markets, driving valuations to the highest level since the technology bubble.”

The next step involves getting kids back to school, which could prove to be a major sentiment hurdle.

“The reopening of schools is proving to be a positive catalyst, with back-to-school shopping on track to exceed last years’ levels,” explained Aneta Markowska, chief economist at Jefferies. She added that in light of new data, an economic resurgence may be taking place.

“We also show early/tentative evidence of improving labor market trends in states where schools reopened in early August.”

The biggest surprise loser of the morning is Apple (NASDAQ: AAPL), which could finally snap a 5-day winning streak if it closes lower this afternoon. Worse than expected consumer sentiment readings might have shareholders rethinking their positions at the top of the tech giant’s historic rally.

The Present Situation Index, which is based on consumers’ assessment of current business and labor market conditions, plunged from 95.9 in July to 84.2 in August.

That’s the lowest it’s been since June 2014, even when accounting for the March coronavirus crash.

“The Present Situation Index decreased sharply, with consumers stating that both business and employment conditions had deteriorated over the past month,” said Lynn Franco, senior director of economic indicators at the Conference Board.

“Consumers’ optimism about the short-term outlook, and their financial prospects, also declined and continues on a downward path. Consumer spending has rebounded in recent months but increasing concerns amongst consumers about the economic outlook and their financial well-being will likely cause spending to cool in the months ahead.”

The drop in consumer confidence is a bit of a shock, especially considering that economists have observed better than expected economic activity in August.

That could mean the U.S. recovery is taking a break due to the disruption of federal unemployment relief. If so, it’s a sobering reminder of just how dependent the U.S. has become on stimulus. Even consumers need bailouts to keep businesses open these days.

Which, believe it or not, isn’t the kind of thing that usually happens in a bull market. Nor when two of the major indexes are trading at record highs.


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