The best way to find out what someone thinks about the economy might be to ask them if they own stocks.
The University of Michigan’s monthly consumer confidence index provides a popular reading of this phenomenon. After bottoming out in June 2022, the indicator has recovered over the past two years, though it remains below pre-pandemic levels.
The rally was driven by the top third of shareholders, whose sentiment jumped 71% over the period, more than six times the increase among non-shareholders. It’s no coincidence that the S&P 500 climbed nearly 50% over the same period.
While this group of major shareholders is enjoying the rise, others feel left out, as if they are not getting the same economic benefits. Currently, the gap in consumer confidence between the two groups is the second-widest since 1998, according to data from the University of Michigan.
“Rising stock markets benefit consumers who own stock portfolios, but leave out those who do not own stocks,” said a University of Michigan consumer sentiment report released in July.
The sentiment gap between big stock owners and non-stock owners has followed a predictable historical pattern. In good times, like the last two years, it has widened. Indeed, the S&P 500 is just 0.6% off its all-time highs.
In contrast, the only times when non-shareholder consumer sentiment has been more positive than that of their shareholder peers have occurred during periods of extreme market weakness. Examples include 2022 (dotcom bubble), 2008-2009 (global financial crisis), 2020 (COVID crash), and 2022 (Fed rate hike).
The chart below shows the dynamics in action. Since the 2022 trough — and in recoveries from similar periods of depressed sentiment — optimism among the top third of shareholders (represented by the red line) has outpaced that of non-shareholders and the overall index.
Looking ahead, all eyes will be on the pace of expected rate cuts by the Fed and how much that will boost an economy struggling with inflation and a tight labor market. Much will also depend on whether artificial intelligence giants like Microsoft and Alphabet can turn big spending into real profits.
If anything were to derail the market’s current bullish outlook, expect shareholder sentiment to decline and the gap described above to narrow from near-record levels.
Have you grown your wealth significantly through stocks in recent years? Are you ready to share your story? If so, contact this reporter at jzinkula@businessinsider.com.
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