Surprising Consumer Activity May Suggest A Deeper Shift In The Markets

ByTTT

Recent economic data suggests that US consumers are starting to pull away from the types of buying/spending activities we saw after the COVID virus event that shifted the US economy away from travel/office and towards work-from-home solutions.  The deep decline in the US and global economic indicators, as a result of the COVID-19 shutdown, prompted an incredible recovery rally phase in the markets that had everyone chasing the uptrend in stocks, housing prices, and other assets.  Now that we are beyond 15+ months after the March 2020 COVID lows, a new dynamic may be setting up in the markets.

Consumers & Trends May Shift Expectations Over The Next 6+ Months

Consumers & Services make up nearly 70% of GDP activity.  Any shift in how consumers feel about the US/Global economy may translate into extended market trends and reflect in other economic data going forward.  In recent research articles, we’ve highlighted how the extended rally phase in the markets continues to push higher in a “melt-up” type of trend – yet current data is starting to show a shift in how consumers are reacting to this extended trend.  The US/Global markets may be setting up for a big shift away from this continued rally phase.

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One concept I want to remind traders of is the continuing normalization of market trends/indicators as the post-COVID-19 recovery continues. The extreme rally phase that has taken place, after the extreme lows resulting from the COVID-19 global shutdowns, is likely to transition into more normalized trending through a process called a “Dampening Sine Wave”.  This process may prompt a fairly big downward economic trend resulting from Month-over-Month and Year-over-Year data trending lower for the next 6 to 12+ months as the data shifts throughout the Sine Wave process.

As time progresses forward, we will see the trends roll over the June/July peak in this Sine Wave process and begin to move downward.  This will shift how consumers perceive global market trends and will shift how economic data is being reported.  What was very strong growth, inflation, and economic data will shift into weaker trends and an eventual downtrend as the Month-over-Month and Year-over-Year data shifts forward.

Consumers Have Already Started Reacting To These Extreme Highs

Consumers, and consumer activity, should always be one of the top economic indicators traders/investors follow.  Additionally, the Transportation Index is another key indicator that leads the US/Global markets by 3 to 6+ months in most cases.  Consumers and consumer activity make up nearly 70% of the US GDP and account for a very large portion of the US/Global economy.  If consumers constrict spending and economic engagement activity over the next few months because of new COVID restrictions, perceptions that the economy has become super-heated, and/or any other issues related to US/World affairs, it is likely that the shifting Dampening Sine Wave process may see an accelerated Amplitude range related to the normal Dampening process compounded by the shifting Consumer sentiment.

Currently, the Michigan Consumer Sentiment data has collapsed -13.55% based on the August 13, 2021 posting – from a level of 81.2 to 70.2.  This comes after Consumer Sentiment has been above 71 since January 2012.  This new low data point for Consumer Sentiment may represent a big shift in how consumers are reacting to the global market trends and the US Federal Reserve pushing the envelope related to interest rates and economic activities.

(Source: https://www.investing.com/economic-calendar/michigan-consumer-sentiment-320)

If we stop to consider how important the consumer is and the psychological aspects of a shifting economy as we have described above, one must stop and ask two simple questions –  “what happened the last time consumers pulled away from economic activities and how long did it take them to re-engage in normal spending activities?”. 

The answer to that question is that this type of consumer reaction has only happened once in the past 10 years, based on data sourced from Investing.com using the Michigan Consumer Sentiment data.  

April 9, 2020 (-20.31%) and April 24, 2020 (-19.42%) – right at the peak of the COVID-19 global shutdown crisis.

Prior to those dates, we have to go all the way back to 2010 & 2011, just after the Housing Market crash where the markets were struggling to regain upward momentum, and the Consumer Sentiment levels bottomed out at 56.2.

In Part II of this research article, we’ll continue to explore the shifting tides of the US and global markets in relation to our belief that the Dampening Sine Wave process is continuing to unfold.  This means traders and investors need to be prepared for extreme volatility events over the next 12 to 24+ months and be ever cautious of any new external economic crisis events.  These external events may prompt an increase in the Amplitude and structure of the Dampening Sine wave process and could completely disrupt the global market recovery process taking place right now.

More than ever, right now, traders need to move away from risk functions and start using common sense.  There will still be endless opportunities for profits from these extended price rotations, but the volatility and leverage factors will increase risk levels for traders that are not prepared or don’t have solid strategies.  Don’t let yourself get caught in these next cycle phases unprepared.

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Have a great day!

Chris Vermeulen
Chief Market Strategist