The S&P 500 just broke through its 200-day moving average – one of the most important technical resistance levels.
Investors are celebrating the temporary US-China trade deal that could lead to a broader agreement.
But consumer sentiment is telling a different story…
The chart below shows how the average American feels about the future of the US economy.
Today, people are more pessimistic than during the 2008 financial crisis, revealing a deep disconnect between market optimism and public mood.
This raises a critical question:
Can stocks continue their bull market despite such low sentiment?
The consumer confidence data comes from the University of Michigan’s Consumer Confidence Index, which measures how consumers view their financial future and economic outlook.
The latest reading of 52 is one of the lowest levels ever recorded.
The index has dipped below 60 only 5 times: during the 1973 and 1980s recessions, the 2008 financial crisis, and June 2022.
When we invert the Consumer Confidence Index and put the unemployment rate on top, we see that consumer confidence often leads unemployment.
This was the case in 2020, 2008, 2001, and in every US recession going back to 1953.
Consumer sentiment drives economic health.
Positive sentiment promotes spending, leading to strong growth and robust job markets.
On the other hand, when sentiment drops, people pull back on spending, triggering lower growth and weaker employment.
This is in fact a major risk in today’s environment.
If sentiment remains weak, spending could fall and layoffs may follow.
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Job Market Resilience
Currently, we lack concrete evidence that poor sentiment is has triggered layoffs.
Job growth remains resilient, with 167,000 jobs added in April.
Employment has stayed above 100,000 monthly despite tariff uncertainty and weak sentiment.
Historically, job growth dips below 100,000 before recessions, eventually turning negative as layoffs increase.
Today’s picture actually looks quite different…
Low Sentiment as an Opportunity
Without an economic recession, extremely low consumer sentiment could actually benefit stocks.
Historically, extreme pessimism like this has marked great buying opportunities for stocks over the next 12 months.
When sentiment dropped below 60, the S&P 500 has delivered an average 12-month return of 20%.
The only major exception occurred in June 2008, when stocks declined 28% in the year following poor sentiment readings.
Are we in a similar situation?
Well, in 2008, the S&P 500 tested its 200-day moving average alongside low sentiment but failed to break above it, showing weakness.
Fundamentally, earnings had already declined 24% in the first half of 2008, indicating deep structural problems.
Today’s setup looks quite different.
The S&P 500 has successfully recovered above its 200-day moving average, demonstrating incredible strength.
While short-term pullbacks are possible after such a strong rally, the underlying strength is extremely constructive.
S&P 500 earnings have also been trending higher over recent quarters, showing no structural decline like early 2008.
In fact, earnings could rise further if the administration succeeds in removing Chinese non-tariff barriers against American goods.
Given the S&P 500’s substantial China exposure over recent decades, barrier removal could significantly boost earnings for US companies as they expand Chinese operations.
Our Strategic Approach
Both fundamentally and technically, today’s market looks much healthier than in 2008.
That gives stocks a much better shot at moving higher, even though some short-term consolidation is possible first.
Our golden principle at Bravos Research is to:
Invest when volatility is high (blood in the streets) and trade when volatility is low and market structure is strong.
We’ve transitioned from recommending long-term investments to an environment favoring active trading.
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