Consumer sentiment is sinking across the board — except for Americans with the most stocks

The University of Michigan consumer sentiment index declined to near-record lows in November, largely due to government shutdown concerns, yet sentiment among consumers with the largest stock holdings notably increased by 11% amid strong market performance. This divergence highlights a 'K-shaped' confidence, where broader stock ownership and an amplified wealth effect mean that optimism among wealthier, asset-owning households, who contribute disproportionately to aggregate spending, may continue to support overall consumption despite widespread economic anxieties. The survey data, however, predates recent stock market volatility.

Analysis

The University of Michigan consumer sentiment index registered a significant decline to 50.3 in November from 53.6, nearing its June 2022 all-time low of 50, primarily attributed to concerns over the ongoing government shutdown. This broad-based pessimism affected various demographics, yet a notable exception emerged among consumers in the largest tercile of stock holdings, whose sentiment increased by 11% due to sustained market strength. This highlights a growing divergence in economic outlooks based on asset ownership.

This divergence underscores a "K-shaped" confidence trend, where investors are increasingly optimistic while non-investors grow more pessimistic, a pattern consistent with broader stock ownership across income and age groups over the past five years. For instance, over 54% of Americans earning $30,000-$79,999 are now retail investors, with many starting recently. The survey, however, did not capture the recent Nasdaq selloff, which saw its worst weekly loss since April, driven by concerns over an AI bubble.

The amplified wealth effect, where a $1 increase in stock wealth now translates to a $0.05 marginal propensity to consume (up from $0.02 in 2010), suggests that strong asset values disproportionately support sentiment among asset owners. Given that wealthier, higher-income consumers contribute a significant share of aggregate spending, their increased optimism may help buoy overall consumption. This dynamic could partially offset the broader economic anxieties reflected in the general sentiment decline.

Key Decisions for Investors

• Monitor the duration and resolution of the government shutdown, as its impact on broad consumer sentiment remains a significant downside risk.
• Evaluate portfolio exposure to consumer discretionary sectors, considering the K-shaped confidence and the potential for continued spending from higher-income, asset-owning households to offset broader pessimism.
• Assess the implications of the amplified wealth effect, recognizing that market performance now has a more direct and potent influence on aggregate consumption, particularly among equity holders.
• Watch for further market volatility, especially concerning the "AI bubble" narrative and its potential to erode investor sentiment, which could quickly reverse the positive wealth effect.