5 Divergences in the Stock Market to Keep an Eye on this Fall

With the S&P 500 up nearly 20% and international developed stocks up 13% year-to-date, the markets are having a banner year so far. But, we are squarely in the weakest seasonal months of the year (September and October) and we are starting to see the first signs of divergences between stocks and variables that are related to stock market performance. Not only that, but we have a Federal Reserve that will likely soon lay plans for asset purchase tapering; and a Washington DC that is grappling the debt ceiling, potential government shut downs, potential default, and an infrastructure bill that may include significant tax increases. Needless to say, between market divergences, seasonality, and policy dynamics, there’s a growing potential for the stock market to see some increased volatility in the near future.

So, here are the things we are looking at and will continue to monitor this fall to help ascertain whether 3% dips should be bought or whether a deeper correction is in the offing.

Number 1:

Consumer confidence. Consumer confidence, whether measured by the Conference Board or the University of Michigan is starting to “come off” in a pretty big way. This isn’t the post to opine about the reasons for the decline (inflation, unemployment, housing shortages, gas prices, etc.), but we do note that consumer confidence is highly correlated to stock market performance. This makes sense since fully 57% of US households own stocks. So, it’s interesting that consumer confidence (red line) appears to be collapsing but stocks have held their own (blue line).

In this next chart we show the spread between the YoY % change in the S&P 500 and that of consumer confidence, and we observe that this spread has only been higher on a few brief occasions. This begs the question, will stocks fall or consumer confidence rise?