
Weaker consumer confidence dampens a good week for stocks
Good news on many fronts helped buoy stock markets and lessen inflation risks even if consumers aren't feeling positive.
Some signs that the economy is beginning to wilt, what I call brown shoots, have begun to appear.
In recent earnings calls, Delta Airlines, Dollar General, Macy’s, and Kontoor have expressed concerns about consumers.
Improving consumer sentiment and stock performance in Europe is reflecting positive surprises and rising potential.
Back in the spring and summer of 2009, I remember spending much of my time looking for what we called “green shoots” — signs that the economy, which was in a deep recession, was beginning to recover. I desperately searched hoping to find them. (We did and a slow but lengthy recovery followed.) Now I’m looking for “brown shoots” — signs that the economy is beginning to wilt. This time it isn’t a desperate search but rather a reluctant one, as I’m hoping not to find those brown shoots. We know, however, that recessions are caused by policy mistakes, so we must watch vigilantly for them.
Some brown shoots are appearing:
While all eyes have been on the S&P 500 Index, which briefly fell into correction territory last week, the Russell 2000 Index has quietly fallen much further from its peak. As of Friday, the Russell 2000 Index is down more than 16% from its peak in November 2024, getting dangerously close to bear market territory.9 Small-cap stocks are typically far more sensitive to the economic cycle than large-cap stocks, so we should be pay attention to this very significant drop and the message it’s sending.
Recession is not a fait accompli, as I’ve said before. While the probability of a recession is rising every day and more brown shoots are appearing, we’re far from a contraction becoming a reality. I don’t see a sea of brown shoots right now — far from it. I think a recession can still be prevented by abandoning policies that are negative for the economy (as I’ve articulated in previous articles).
The good news is that change can create opportunity, and sizeable change can create a sizeable opportunity. I’ve talked about the fiscal impulse getting stronger in Europe as countries ramp up defense spending. We’re even seeing an improvement in consumer sentiment in Europe as the Eurozone Economic Sentiment Indicator rose to 96.3 in February, the highest level in five months.10 Investor expectations for the next six months rose substantially, which is very encouraging.11 German economic sentiment is also getting better and is poised to improve further given the results of the federal election in February.12 I would expect positive surprises and improving potential to continue to impact European stock performance. This is a valuable reminder of the importance of diversification.
Geopolitical and economic change may also be creating opportunities in other asset classes, such as gold. It crossed the critical $3,000 per ounce level last week13 and appears poised to rise further, in my view, as uncertainty has become one of the few certainties in this environment.
The most important release this week, from my perspective, will be the Federal Open Market Committee (FOMC) “dot plot,” which will give us insight into FOMC members’ expectations for the US economy and the fed funds rate. The Fed seems committed to sitting on its hands for the time being, but the dot plot will force them to “guesstimate” whether they’ll cut rates this year and by how much. With so much up in the air, it’ll be interesting to see their expectations. I’m sticking with my view that we’ll get several rate cuts this year. This is important because, with such strong fiscal policy headwinds, it seems one of the few areas of hope for positive surprise in the US will come from a Fed that provides some easing this year.
The Bank of Japan (BOJ) meets this week, on the heels of shunto negotiations, which indicate 2025 will be another year of significant wage growth. Long-maturity government bond yields have risen, suggesting rising odds the BoJ will hike rates at this meeting. If it does raise rates, I think it’ll be viewed positively as another vote of confidence in the Japanese economy. The Bank of England and the Swiss National Bank also meet this week, and it’ll be helpful to get their assessments of their economies and the global economy.
Date |
Report |
What it tells us |
---|---|---|
March 17 |
US retail sales |
Indicates the health of the retail sector. |
|
NAHB Housing Market Index |
Indicates the health of the US housing market. |
March 18 |
Eurozone ZEW Economic Sentiment |
Measures economic sentiment in the eurozone for the next six months. |
|
Canada Consumer Price Index |
Tracks the path of inflation. |
|
Bank of Japan Monetary Policy Decision |
Reveals the latest decision on the path of interest rates. |
March 19 |
Eurozone Consumer Price Index |
Tracks the path of inflation. |
|
FOMC Monetary Policy Decision |
Reveals the latest decision on the path of interest rates. |
|
Australia Unemployment Rate |
Indicates the health of the job market. |
March 20 |
UK Unemployment Rate |
Indicates the health of the job market. |
|
Swiss National Bank Monetary Policy Decision |
Reveals the latest decision on the path of interest rates. |
|
Bank of England Monetary Policy Decision |
Reveals the latest decision on the path of interest rates. |
|
US Existing Home Sales |
Indicates the health of the housing market. |
|
UK GfK Consumer Confidence |
Measures the level of consumer confidence in economic activity in the UK. |
March 21 |
Canada Retail Sales |
Indicates the health of the retail sector. |
|
Brazil Federal Tax Revenue |
Funds government programs and services. |
Good news on many fronts helped buoy stock markets and lessen inflation risks even if consumers aren't feeling positive.
A China-US tariff de-escalation, the Federal Reserve stays in wait-and-see mode, and the Bank of England strikes a hawkish tone while cutting rates.
In our monthly market roundup for April, Invesco experts give a rundown of a mixed month for global equity markets, as well as an update on fixed income markets.
Sign up to receive the latest insights from Invesco’s global team of experts and details about on demand and upcoming online events.