Sentiment Improves, Though Still Not Great

After a prior week that was largely devoid of significant economic reports, this shortened week featured several.  For the most part, they were decent, including this morning’s sentiment reports from the University of Michigan.

Earlier this week we noted that the Conference Board’s report on Consumer Confidence…

…didn’t just rise – it zoomed.  The reading went from 85.7 to 98, a stunning 12.3-point jump that was more than 10 points above the 87.1 consensus.   The improved sentiment was attributed easing of tariff tensions, since the survey was taken after the May 12^th moratorium on China tariffs. 

Today’s UMich report wasn’t quite as stunning, but it was solid.  The main sentiment reading rose to 52.2, up from 50.8 and above the 51.5 consensus estimate.  All the associated measures improved as well, with Current Conditions rising to 58.9 (57.6 prior, 58.0 exp), Expectations rising to 47.9 (46.5 prior, 47.7 exp), 1-Year Inflation falling to 6.6% (7.3% prior, 7.1% exp), and 5-10-Year Inflation falling to 4.2% (4.6% prior and expected). 

All of those were solid improvements, though none of them are still what one would consider good.  Sure, inflation expectations of 6.6% are far better than 7.3%, but they are still unacceptably high.  Indeed, while the 52.2 sentiment reading was above last month, it is still flirting with multi-year lows.  For that matter, the welcome jump in the Conference Board number only took that reading off Covid-level lows. People are certainly feeling better than they were, but one might describe this from moving from morose to malaise. 

Some of the positive sentiment is likely to be a result of the improving stock market.  Today is the last day of the best Mays in decades.  As I type this, the S&P 500 (SPX) is up +5.56% for the month.  That would be the best May this century, exceeding the +5.31 reading of May 2009, which was the 3^rd month of the rally that finished the Global Financial Crisis.  The current reading of +8.36% for the Nasdaq 100 (NDX) was last exceeded by May 2005’s +8.58%.  “Sell in May” certainly hasn’t worked this year.

This afternoon remains an important question mark.  One might expect institutional investors to be incentivized to do a bit of window dressing on the last day of the month.  Yet some might be more willing to accept that their holdings have done so well that they don’t need an additional boost.  Other investors might be more concerned about position squaring ahead of the weekend and the new month.  My gut leans toward the latter.  The President was not thrilled at being accused of chickening out on his tariff threats and watching their (for now temporary) failure in the courts.  It would not be out of the question for traders to fear an escalation to prove them wrong.

(Note: As I was sending this for publication, a story hit the wires about the US planning wider China tech sanctions. Stocks quickly sank about -1% on the news.  Cue the dip buyers?)