By Daniel McGarvey, CFA on behalf of Stonebridge Financial Group advisors
While the stock market reached all-time highs in May, consumer sentiment hit an all-time low. The University of Michigan Consumer Sentiment Index, which surveys the financial situation and expectations of the average American consumer, measured the weakest reading in its 70+ year history last month (see chart below, with recessions in grey). Source of below chart: YCharts
The good news is that the S&P 500 has historically had strong double-digit returns one year after troughs in consumer sentiment. Also, other measures like the Conference Board Consumer Confidence Index, which is more of a job market indicator, and the NFIB Small Business Optimism Index, which indicates the willingness of businesses to expand, are not substantially below their long-term averages.
There is reasonable concern, however, that such a low reading for consumer sentiment could be an indicator of increased consumer stress to come. Spending has been remarkably resilient in recent years despite lower sentiment, but there are now multiple factors that could potentially lead to tighter wallets in the back half of the year.
Most notably, inflation has crept back up because of higher energy prices stemming from the conflict in Iran and disruption risk around the Strait of Hormuz. Although most households have also received larger-than-usual tax refunds at the same time, the fact that average gas prices have exceeded $4/gallon for over two months means that a significant portion of that stimulus had to go towards fuel, especially for lower- and middle-income families. As we move further away from tax season and refunds are fully spent, we might start getting a clearer picture of how inflation is squeezing consumption. The situation would improve with a full reopening of the Strait of Hormuz, but the floor on prices has likely been raised in the near-to-intermediate term regardless because of an ongoing risk premium in the Middle East.
Another major factor to consider is that the personal savings rate has fallen to a 3-year low of 2.6%, meaning that Americans are likely stretching their budgets thin by spending over 97% of their disposable income. The high level of spending has been a great support for the economy, but it may not be sustainable since it leaves little margin for error and increases reliance on savings drawdowns or credit. As shown below, the percentage of credit balances that are 90+ days delinquent has been trending up for most categories outside of housing. The data is as of the end of March, but we will be watching closely to see how it changes as the sugar high of tax refunds wears off, especially if the war drags on. Source of below chart: Federal Reserve Bank of New York
The S&P 500 returned 5.3% in May on the back of continued strong earnings, leading to a 19.8% gain since the March low. The Bloomberg U.S. Aggregate Bond Index returned 0.3% as short-term interest rate expectations began to shift toward the possibility of a rate hike next year, while the 10-Year Treasury yield reached as high as 4.67%. WTI crude oil prices exceeded $112 per barrel in mid-May before retreating closer to $100 per barrel.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
June 2026 Commentary: The State of the Consumer
By Daniel McGarvey, CFA on behalf of Stonebridge Financial Group advisors
While the stock market reached all-time highs in May, consumer sentiment hit an all-time low. The University of Michigan Consumer Sentiment Index, which surveys the financial situation and expectations of the average American consumer, measured the weakest reading in its 70+ year history last month (see chart below, with recessions in grey). Source of below chart: YCharts
The good news is that the S&P 500 has historically had strong double-digit returns one year after troughs in consumer sentiment. Also, other measures like the Conference Board Consumer Confidence Index, which is more of a job market indicator, and the NFIB Small Business Optimism Index, which indicates the willingness of businesses to expand, are not substantially below their long-term averages.
There is reasonable concern, however, that such a low reading for consumer sentiment could be an indicator of increased consumer stress to come. Spending has been remarkably resilient in recent years despite lower sentiment, but there are now multiple factors that could potentially lead to tighter wallets in the back half of the year.
Most notably, inflation has crept back up because of higher energy prices stemming from the conflict in Iran and disruption risk around the Strait of Hormuz. Although most households have also received larger-than-usual tax refunds at the same time, the fact that average gas prices have exceeded $4/gallon for over two months means that a significant portion of that stimulus had to go towards fuel, especially for lower- and middle-income families. As we move further away from tax season and refunds are fully spent, we might start getting a clearer picture of how inflation is squeezing consumption. The situation would improve with a full reopening of the Strait of Hormuz, but the floor on prices has likely been raised in the near-to-intermediate term regardless because of an ongoing risk premium in the Middle East.
Another major factor to consider is that the personal savings rate has fallen to a 3-year low of 2.6%, meaning that Americans are likely stretching their budgets thin by spending over 97% of their disposable income. The high level of spending has been a great support for the economy, but it may not be sustainable since it leaves little margin for error and increases reliance on savings drawdowns or credit. As shown below, the percentage of credit balances that are 90+ days delinquent has been trending up for most categories outside of housing. The data is as of the end of March, but we will be watching closely to see how it changes as the sugar high of tax refunds wears off, especially if the war drags on. Source of below chart: Federal Reserve Bank of New York
The S&P 500 returned 5.3% in May on the back of continued strong earnings, leading to a 19.8% gain since the March low. The Bloomberg U.S. Aggregate Bond Index returned 0.3% as short-term interest rate expectations began to shift toward the possibility of a rate hike next year, while the 10-Year Treasury yield reached as high as 4.67%. WTI crude oil prices exceeded $112 per barrel in mid-May before retreating closer to $100 per barrel.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
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