By now the news that the University of Michigan Consumer Sentiment Report for April was at the lowest level since March 1982 has been almost fully digested. A number of bloggers have done an excellent job pointing out that lows in this index often coincide with lows in the stock market. Babak at Trader’s Narrative , for instance, has an excellent graph of sentiment and stocks in Consumer Sentiment Always Darkest Before the Dawn. Don Fishback’s Market Update has a similar chart up today.
The upcoming Pennsylvania primary notwithstanding, I am going to set aside poll data for the moment and focus on one of my favorite consumer sentiment indicators: a comparison of consumer discretionary stocks to consumer staples stocks. This can easily be done with two sector ETFs, XLY (Consumer Discretionary Select Sector SPDR Fund) and XLP (Consumer Staples Select Sector SPDR Fund.) Keeping in mind that stocks are supposed to lead the economy by 6-9 months, the XLY:XLP ratio should tell us something about how stocks are pricing in expected consumer spending patterns over the next 2-3 quarters.
The XLY:XLP chart below is a weekly chart, which provides a sense of the recent ebbs and flows of consumer spending patterns. The chart demonstrates that when the ratio trends down and/or makes a significant low, these events usually coincide with market bottoms. It remains to be seen whether this pattern will hold in the current economic environment, but there are signs that the consumer discretionary ratio, like equities, is starting to move off of the recent bottom. This is an important ratio, not just for what it suggests about future consumer spending patterns, but also for flagging the extent to which investors feel compelled to favor the more defensive consumer staples stocks or the more speculative consumer discretionary ones.