Consumers and investors feel better

A funny thing happened on the way to 2024: Consumers feel better!

The University of Michigan consumer sentiment index jumped 13 percent in January from December to reach its highest level since July 2021.

The reading follows a sharp increase in December and cumulatively sentiment has climbed 29%, the largest two-month increase since 1991.

The positive trend, which persisted across different regions, incomes, ages, and education attainment, is likely due to the same culprit that drove sentiment into a ditch: inflation.

Joanne Hsu, director of consumer surveys at the University of Michigan, said the gains were “supported by confidence that inflation has turned a corner,” underscored by the survey’s one-year-ahead inflation measure dropping to 2.9%, its lowest since December 2020.

Dropping below 3% isn’t just a round number milestone: It means that the year-ahead measure is within the 2.3 – 3.0% range seen in the two years prior to the pandemic.

With the inflationary fever breaking, sentiment is almost 60% higher than the all-time low notched in June 2022 (when the Consumer Price Index peaked at 9.1%), and is now just 7% shy of the historical average since 1978.

The improvement may partially explain why December retail sales were better than expected. Strong consumer spending, a revival in manufacturing investment and increased state and local government purchases helped power the overall economy last year.

The good news has spilled into the stock market, where you may have missed another milestone: The S&P 500 stock market index reached a new closing high of 4,839.81 on January 19, besting the prior closing record of 4796.56, set on January 3, 2022. The index went 512 trading days without a new record, the longest stretch since a fallow period of 1,375-sessions that ended in March 2013.

News about stock movements impacts more people than you might think.

According to Gallup 61% of U.S. adults say they have money invested in the stock market, the highest percentage since 2008. The massive hit to stock prices from October 2007 – March 2009, a period when the S&P 500 dropped by almost 57%, likely “deterred new investors from entering the stock market and caused others to take their money out of stocks and put it elsewhere.”

As recently as 2016, stock ownership was at 52%. Gallup researchers note that the period of low stock ownership meant that many potential investors missed out on the subsequent recovery in stocks.

A similar trend occurred in double-time over the past two years. 2022 was a terrible year for stocks, with the S&P 500 falling 19.4% and the Nasdaq Composite tumbling by 33.1%.

After that wash-out, many bailed on their long-term strategies and sought the protection of safe assets, like high-yielding savings and money market accounts, certificates of deposit and Treasury bills, all of which were finally paying a decent amount of interest. I heard from a lot of those folks who were happy about 5% on cash and planned to get back in “when things get better.”

Of course, this is the fallacy of attempting to time the market – you don’t know when to get out or back in!

The losers of 2022 became the big winners of 2023. The so-called “Magnificent Seven” (Apple, Amazon, Alphabet, NVIDIA, Meta, Microsoft, and Tesla) helped drive the overall stock market higher. In 2023, the S&P 500 was up 24.23% and the Nasdaq jumped 43.42%.

What’s the short- and long-term lesson?

Stick to your diversified portfolio of index funds and avoid timing the market. Doing so will do wonders for your confidence!

Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check her website at www.jillonmoney.com.