After opening lower this morning on the heels of some pessimistic futures trading, the market reversed just a few hours later, “flipping the script” and retracing its early losses in a hurry. The University of Michigan released their preliminary print of the consumer sentiment index (CSI) just ahead of the trading session’s halfway point today, revealing to investors that the CSI has risen to its highest level in 15 years.
The index, which was originally created in the late 1940s by Michigan Professor George Katona, measures consumer optimism/pessimism levels based on the polling of consumer opinions – particularly in relation to their view of their own financial situation, the short-term economy, and the long-term economy.
It’s not to be confused with the Consumer Confidence Index (CCI), which considers consumer saving and spending habits purely in terms of dollars, not “feelings” like the CSI. The CCI, by comparison, is widely regarded by analysts as a crucial economic indicator, while the CSI is seen as less important.
After all, in 2007-2008, plenty of people “felt confident” about the housing market right before it collapsed.
That doesn’t mean that one index is better than the other, though – they’re simply different. One tries to divine consumer sentiment (hence the name), the other looks at raw data.
And even though many economists view the CSI as the lesser of the two, they still like to make predictions about it. According to numbers published by several prominent financial publications, economists expected a CSI reading of 97.5 for early May.
The actual number – 102.4 – “beat” estimates significantly, rising a whopping 5.2 points since April, which came in at 97.2.
The strong CSI measurement shouldn’t come as too much of a surprise, though, after GDP growth from Q1 of this year also blew past early estimates.
In response to the optimistic index reading, the market surged as of midday, marked by a Dow and S&P rebound of roughly 1% from their low opens.
But some analysts are concerned that the CSI is simply providing false hope in the wake of rekindled trade tensions. Richard Curtin, chief economist for the Survey of Consumers, warns that investors should be wary of the recent report’s validity, as it was tabulated before the recent tariff hikes.
“Consumers viewed prospects for the overall economy much more favorably, with the economic outlook for the near and longer term reaching their highest levels since 2004,” said Curtin.
“To be sure, negative references to tariffs rose in the past week and are likely to rise further in late May and June.”
So, while investors today are excitedly “buying the news” of rosy consumer sentiment, they also should be careful not to overstep. And yes, I totally understand where they’re coming from and why they’ve decided to pile back in.
Long-term, the US economy still appears to be as strong as ever and buying after a “dip” just makes sense, especially to a trader like me.
But letting a consumer index, one that’s guided by “feelings”, take control of your portfolio is a major investing “no-no”. It gets even worse when you consider that most of the consumers were polled before the tariff drama even began.
As usual, the price action on the charts will end up determining which moves you should really be making. We’ll see what happens over the next week, but don’t at all be surprised to see a few “down days” as big-name economists and investors start to poke holes in the recent CSI reading.