As consumer mood sours, are investors overly optimistic?

Morgan Stanley Wealth Management


Summary: Why US stock markets may reflect too much optimism about consumer spending, heading into what could be a subdued year-end shopping season.

US consumers have a lot on their minds recently, weighed down by the coronavirus Delta variant, a more-sluggish-than-expected jobs recovery, inflation worries, and political wrangling in Washington, D.C. At the same time, financial markets seem to be “climbing a wall of worry,” confident that these growing anxieties about inflation, supply-chain disruptions, and the economic drag from the pandemic will soon pass. 

Morgan Stanley Wealth Management believes the consumer perspective warrants attention. Negative sentiment, especially heading into the year-end holiday season, may foreshadow market weakness, catalyzed by lower-than-expected spending and disappointing corporate earnings.

First, consider that consumer confidence and stock market moves have historically been well correlated; any notable divergences tend to be short-lived. But today, the gap between the two remains uncharacteristically wide. On the consumer side, the Conference Board’s confidence index fell in September for the third straight month, with the gauges of current and future conditions at 5- and 10-month lows, amid lingering concerns over higher prices and a slow job-market recovery. Also, job growth stalled again in September, missing estimates and signaling that the forces holding back hiring or returning to the workforce may persist. 

At the same time, investors’ “buy the dip” mentality, anchored by a belief that inflation is transitory and corporate margins will be sustainable, has bolstered the stock market. US equities did hit a rough patch in the third quarter, but the downturn was contained to within 5% of the pre-Labor Day highs, and advances so far in October suggest that the third-quarter speedbumps may now be behind us.

Still, are investors overly optimistic? How can market views be so disconnected from consumers’ outlook? Two key factors may be behind the split:

  • Investors appear less worried about inflation than consumers. Markets are pegging inflation expectations around 2.5%, while consumers anticipate prices rising 4.6%, according to a recent University of Michigan survey1—more in line with September’s reading of 5.4% for the Consumer Price Index (CPI)2 and August’s 4.3% for the Personal Consumption Expenditures (PCE) Price Index.3 While the Fed and markets may view inflation as transitory, consumers often see rising prices—especially for things like energy, rent, and food—as reason to curb discretionary spending.
  • Investors and consumers seem to be interpreting supply-chain disruptions differently. Corporate earnings revisions have continued their upward trend, indicating investors appear confident that inventory shortages stemming from supply-chain troubles will simply delay, rather than destroy, demand. But for consumers, the lack of inventory may actually mean that they can’t find what they want at prices they can afford—or at all. This helps explain why real personal spending is growing at less than 1% annually, well below the historical trend, and why the savings rate, at 9.4%, remains well above average.  

In short, financial markets seem to be pricing a scenario where inflation is transitory, corporate pricing power can preserve profits, and policy tussles in Washington remain a sideshow. Consumers appear to be anticipating a very different situation—one where inflation proves sticky and weighs on real wage and income growth, supply-chain disruptions eventually lead to lost consumption, and policy uncertainty keeps consumer spending low and savings high.

Of the two, the consumer perspective may be worth serious consideration. Morgan Stanley Wealth Management believes inflationary conditions will likely last longer, posing greater risks to corporate earnings forecasts, especially if consumer sentiment translates into lower spending. 

Investors should pay close attention to whether consumer sentiment and market metrics reconverge. Given the different potential year-end economic scenarios—stronger growth vs. a slowdown—investors may consider cutting passive index exposure in favor of the barbell approach, with cyclicals on one end and defensive stocks on the other. Of course, decisions should reflect individual investing goals, timelines, and risk-tolerance levels, keeping in mind that diversification is a solid strategy in all market conditions.


The source of this Morgan Stanley article, As Consumer Mood Sours, Are Investors Overly Optimistic?, was originally published on October 12, 2021.

  1. Morgan Stanley Wealth Management, Global Investment Committee Weekly report, “Mind the (Confidence) Gap,” 10/11/21
  2. Bureau of Labor Statistics, Consumer Price Index Summary, 10/13/21,
  3. Bureau of Economic Analysis, Personal Income and Outlays, August 2021, 10/1/21,

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