Alma A. from Lakeville, MN asks: Hello Mitch, I’ve seen reports that Americans are feeling very pessimistic about the economy at the moment. And yet, the stock market is acting like everything is hunky dory and all is well. I have a hard time wrapping my head around these two very different outcomes. Can you explain?
Mitch’s Response:
Thank you for sending in your question. Let’s first expand on the sentiment part of your question. According to the University of Michigan’s index of consumer sentiment, Americans are feeling pretty dour on the economy. The index took another step down in May, falling to 50.8—the second-lowest level since the survey began more than 70 years ago. That puts the reading just above the all-time low reached in mid-2022, during the height of the inflation surge.1
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Perhaps you already see an important takeaway here. The last time the index of consumer sentiment was this low, inflation and interest rates were rising, and the stock market was in decline. But falling sentiment did not portend an economic recession, which in my view was a key driver of strong returns in 2023 and 2024 (in addition to the AI theme). In other words, as the U.S. economy ultimately performed better-than-expected, the stock market roared back.
In the current environment, sagging sentiment can undoubtedly be tied to trade and tariff policy. Indeed, the share of survey participants citing tariffs as a top concern rose sharply in recent months, reaching three-quarters of respondents in the latest report. While the economic impact of these policies is still playing out, the psychological toll is already visible. One way to read this as an investor: expectations are falling, which arguably means the U.S. economy now has a lower hurdle to clear to surprise to the upside.
Expectations for inflation have also moved higher, with consumers now projecting prices to rise more than 7% over the next year — up notably from last month. So what happens if inflation does not rise nearly that much? In my view, the answer is that sentiment will swing back to the positive, but the market will have already likely made its move.
It’s worth emphasizing that surveys like the index of consumer sentiment measure how people feel—not necessarily how they act. Past episodes of low sentiment have not always coincided with declines in spending or investment. And in recent years, political affiliation has played a growing role in shaping consumer perceptions, which can skew readings further away from underlying economic reality.
I don’t mean to dismiss any and all risks here. Trade tensions remain high, and retaliatory measures or policy missteps could still dampen growth. But when sentiment hits historically low levels, it often sets the stage for positive surprises. I think today’s pessimism may actually be laying the groundwork for potential upside, especially if trade negotiations improve or markets regain clarity. Relief, even in modest doses, can be a powerful force.
With uncertainty ahead, it’s crucial to prepare for the unexpected. To help you do this, I’m inviting you to download our free guide, How Solid Is Your Retirement Strategy?4. Inside, you’ll find practical tips to build a “weatherproof” plan that helps protect your retirement savings through any challenge. You’ll also discover:
- The importance of flexible portfolio allocation
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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, download our free guide today!
Disclosure
2 University of Michigan. 2025. https://www.sca.isr.umich.edu/charts.html
3 ZIM may amend or rescind the guide “How Solid Is Your Retirement Strategy?” for any reason and at ZIM’s discretion.
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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