Broker Check

Sentiment and Market Returns

| February 21, 2023

2022 was a tough year for investors, with both stocks and bonds down sharply from all-time highs. Add to that decades-high inflation, a hawkish Federal Reserve, and the ongoing war in Ukraine, and it may come as no surprise that consumer sentiment is showing signs of pessimism. The University of Michigan Consumer Sentiment Index, which surveys consumers to measure attitudes toward personal finances and general business and market conditions, hit historic lows in June 2022, surpassing levels hit during the COVID-19 pandemic and Global Financial Crisis. We argue that the level of extreme pessimism is overdone and that a recovery in sentiment data in 2023 is justified amidst a recovering capital market background and receding inflationary pressures. Such improvements have historically coincided with positive risk appetite within equity markets and robust economic activity.

Historically, extreme investor pessimism has been a strong contrarian indicator for above-average short-term stock market returns in the months that follow. To reach this conclusion, we looked at past troughs in the University of Michigan’s Consumer Sentiment data going back to 1978 and subsequent 3-month, 6-month, and 12-month returns for the S&P 500 Index. When consumer sentiment bottomed in prior market cycles, forward 3-month returns averaged over 6%, with 82% of occurrences providing a positive return, forward 6-month returns averaged over 13%, with 100% of occurrences providing a positive return, and forward 12-month returns averaged over 22%, with 94% of occurrences providing a positive return.

Overall, our assessment is that the level of extreme pessimism is unjustified, providing a strong contrarian indicator that positive equity returns may be in store in the months ahead.


Investment advice offered through CX Institutional, a registered investment advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in the presentation may not develop as predicted.

All data is sourced from Bloomberg, through the release of monthly figures from the U.S. Bureau of Labor Statistics or from the Federal Reserve and any of its affiliated regional location.