In One Chart: This warning light indicates consumer sentiment could soon sour

In One Chart: This warning light indicates consumer sentiment could soon sour

Several forces combine to influence how consumers feel — and spend and invest — but perhaps none hurts and helps households as much as gas prices and mortgage rates, a key driver of housing sentiment and strength.


Freddie Mac’s 30-year U.S. mortgage rate, which tracks Treasury yields TMUBMUSD10Y, +0.43%  , has risen to about 4.5%, a five-year high and a noticeable rise from the 3.5% average seen just a few years ago. The average price of regular gasoline RBX8, -0.61%   has risen by almost 50% since early 2016.


Jim Paulsen, chief investment strategist at Leuthold Group, likes to chart what he calls the “yield-gas indicator,” a measure that often previews, if imperfectly, consumer confidence indexes such as the monthly releases from the Conference Board and the University of Michigan. It’s a relationship that dates to the 1980s, according to Paulsen.


The graphic below shows a big gap (the red line is inverted because gains there are a “negative” for sentiment) between the worrying costs of more expensive gasoline combined with the rise in mortgage-proxy bond yields (that’s the red line) and the strong readings for consumer confidence (blue line).


imageJim Paulsen/Leuthold Group

Read: Americans’ fascination with ‘mortgage rates’: a tour through financial market history


More importantly for investors, as consumer confidence fades, so does a high-priced stock market, Paulsen argues.


“When this bull market began in March 2009, U.S. confidence had collapsed to a post-war low. Fear was palatable, valuations were extremely low and nearly every world policy official was working in concert to improve both confidence and the stock market’s valuation,” he said.


“Today, by contrast, confidence has returned close to post-war highs, valuations are upper quintile and many policy officials are employing tools (interest rates, yield curves and money supplies) which are likely to worsen both confidence and stock market valuations.”


Paulsen’s suggested antacid for a gas- and yield-driven sentiment shift? Defensive stocks such as utilities and consumer staples. Proceed with caution on cyclical (often consumer-driven) stocks such as consumer discretionary and materials stocks, he said.


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