Michael D. from Camas, WA asks: Happy New Year, Mitch. When evaluating my investment positioning, I tend to look at fundamentals, sentiment, and technical factors. My question for you is regarding sentiment—do you think the positive swing in consumer and investor sentiment is a warning sign, i.e., getting a little detached from reality?
Mitch’s Response:
Thanks for writing, Michael, and Happy New Year to you as well.
Let’s start with consumer sentiment, which has experienced a solid uptick in recent months according to the University of Michigan’s consumer sentiment index. In November, the index surged from 71.8 to 74.0, and a strong holiday shopping season suggests that American households ended the year feeling confident.1
However, reading into the data a bit more closely reveals a few key takeaways. The first is that sentiment surged along party lines – Republicans largely reported feeling very optimistic about economic prospects looking ahead, while sentiment declined for Democrats. This pattern lines up with what we’ve seen in past elections, so no real surprise here.
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Another takeaway is that many consumers appeared to be pulling forward purchases in anticipation of price increases in the future. The uncertainty of tariffs is a key driver, which may actually suggest a more cautious—as opposed to euphoric—positioning for U.S. households. Indeed, if you zoom out to look at where sentiment is historically, it’s still relatively low (see chart below). High borrowing rates and the lingering sting of inflation are likely to keep consumers ‘anchored to reality,’ if you will, and I don’t see these factors changing much in 2025.
On the investment and Corporate America side of the sentiment equation, there’s evidence that sentiment has firmly drifted into ‘optimistic’ territory. A recent survey of 1,000 retail investors found that 60% were optimistic about their portfolio, while only 15% were pessimistic. CEOs are also feeling quite confident—a Deloitte survey found 84% of CEOs either optimistic or very optimistic about their company’s performance in 2025. The reasons given were ones we’ve highlighted before, i.e., deregulation, fiscal stimulus, and increased capital markets activity.
It is this investor and business sentiment that should be an area of focus for investors in the new year, in my view. Stocks tend to rally when economic realities exceed expectations. If the bar is set too high for earnings, profitability, and economic growth, it raises the probability that companies and the U.S. economy could fall short. And that tends to be the recipe for downside volatility.
Investor optimism is high, but when expectations are set too high, downside volatility becomes more likely. With the market at new highs and so many unknowns ahead, it’s crucial to have a strategy that accounts for these uncertainties.
Get our free guide, How Solid Is Your Retirement Strategy?4, and learn how to build a “weatherproof” retirement plan. In this report, you’ll find:
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- Understanding your risk tolerance in case of a market downturn
- Plus, more strategies to help you protect your retirement assets
If you have $500,000 or more to invest, this guide will help you protect your nest egg from potential market storms.
Disclosure
2 ZIM may amend or rescind the guide “How Solid Is Your Retirement Strategy?” for any reason and at ZIM’s discretion.
3 Fred Economic Data. December 20, 2024. https://fred.stlouisfed.org/seriesBeta/UMCSENT#
4 ZIM may amend or rescind the guide “How Solid Is Your Retirement Strategy?” for any reason and at ZIM’s discretion.
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