Chart for the Weekend: Sentiment Sours

Bad moods haven't resulted in big portfolio re-allocations, but history suggests that divergence won't persist

Preliminary May data from the University of Michigan shows a big drop in Consumer Sentiment this month. Sentiment overall is at its lowest level for 2023, while the expectations component is at its lowest level since last summer.

More Context: The onset of COVID frayed the historically tight relationship between sentiment and household equity exposure. It’s gotten even more out of whack over the past 18 months. While sentiment dropped to its lowest level in decades, equity exposure has remained above average. Bad moods haven’t produced big portfolio re-allocations.

This environment is unprecedented in many ways, making it difficult to draw firm conclusions. But my guess is that the longer sentiment remains sour, the more likely it is that restoration of the historical relationship between sentiment and positioning re-emerges through a reduction in equity exposure.

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