The latest consumer sentiment data from the United States has continued to weaken, with another reading indicating that consumers remain pessimistic.  Similar survey data which asks people how confident or pessimistic they feel about the outlook for the economy in Europe show a similar picture, with data indicating that people and businesses currently have low confidence in the strength of the economy. 

But when we look at data on retail sales and wider economic growth, the data are more positive.  In China, the US and Europe, there has been a noticeable (albeit still small) uptick from recent lows in retail sales growth and other activity data.  The Q3 GDP data for the US was very strong, indicating that nominal growth in the economy is robust, even though inflation has been coming down at the same time. 

What is more, we have just had an earnings season where on the whole corporate results were good.  Across many sectors of the economy, we are seeing strong demand continuing.  Experiential services are seeing record levels of demand, travel demand growth has slowed somewhat but remains strong.  Spending by businesses on IT services and cloud was solid, while investments into artificial intelligence are already starting to show up in reported earnings of the suppliers of that technology. 

So… what gives?  Why the pessimistic sentiment indicators and should we be listening to them?

It is worth noting that sometimes sentiment indicators can reflect the emotions of the people replying to the surveys, rather than the reality of what is happening in the economy.  This is not to say that these indicators are useless, they are helpful in telling us how participants in the economy feel, and that does matter.  But there can be times where sentiment is detached from reality, both on the upside and on the downside.  Ebullient and very bullish sentiment has sometimes in the past been detached from the reality of a slowing economy, and vice versa, sometimes sentiment is overly pessimistic relative to the actual performance of the economy.

We suspect that we may currently be seeing a mismatch between sentiment indicators and reality.  The sentiment indicators continue to reflect the pessimism of survey participants who have been battered by inflation, volatile markets, and a series of geopolitical shocks.  Meanwhile the underlying economy has remained surprisingly robust, especially the US economy, corporate earnings are solid, inflation has come down, and higher interest rates are yet to have any major slowing effect on the economy. 

From here, either the economy slows down rapidly to reflect the pessimistic sentiment, or the sentiment becomes more optimistic to reflect the solid economy. 

In the long run, it has always paid to be optimistic as an investor.  Bet on the long-term productive capacity of the economy and remain invested in equites for the long-haul. 

In this case, it may also pay to be optimistic in the short-term too.

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