Discretionary consumption and consumer sentiment, recovery attempts
Last Update: 25/12/2024
By analyzing the strength relationship between consumer discretionary consumption and the S&P500 index, we can see how consumer sentiment changes over time. The graphs show a recovery started since late summer 2024 and confirm the close relationship with inflation and FED rate policy.
Intermarket analysis can also be useful in investigating consumer sentiment. In his “Intermarket Analysis,” John J. Murphy suggests that we look at the relationship between the consumer discretionary sector and the S&P500 index. If this ratio shows a positive trend, the indication we can take from it is that consumers are buying goods that are not strictly necessary and therefore their expectation of economic performance is improving.
Let us go, then, to see what the current situation of the discretionary consumption sector is. Let us first see a long-term snapshot of it and then analyze what is happening in the short term.
As can be seen from the chart above, the strength of the discretionary consumption sector has been gradually fading under the blows of increasingly heavy inflation and the Fed’s tightening monetary policy. The ratio declines from the second half of 2021 until it reaches a miminum in mid-2024. In this long phase of weakness it goes below the 10-year historical average (blue line).
In the short term (1 year), the situation confirms what appears to be a tentative turnaround. Since late summer 2024, discretionary consumption has returned to doing better than the overall index, a signal that implies an increase in consumer confidence. It is certainly no coincidence that this recovery coincides with the U.S. central bank’s decision to cut Fed Funds rates by 50 basis points, confirming that inflation is on a downward trend and the possibility of further cuts between now and year-end.
Interesting analysis of the correlation between discretionary consumption and US 10-year bond yields, we see it below.
After the pandemic, the correlation between the two has been turning negative, from a zero correlation on average at 10 years, to a moderately negative correlation in the 3-year average. Currently, the correlation between discretionary consumption and 10-year bond yield continues to be moderately negative. If one goes up, the other tends to go down.
