US Sentiment Index Signals Steady Improvement

In July, the market dealt with a bunch of conflicting signals about economic confidence and sentiment. The Thomson Reuters/University of Michigan preliminary sentiment index decreased to 66.5, the lowest since August 2009, from 76 in June. The reading was lower than the most pessimistic forecast of economists in a Bloomberg News survey. The 9.5-point decline in the index was the biggest since October 2008.

The Conference Board, a New York-based business and economics research group, reported that American consumers lost confidence in July, shaken by mounting concern over jobs and wages. The Conference Board’s sentiment index fell to 50.4, below the median forecast of economists surveyed by Bloomberg News. The confidence gauge was forecast to drop to 51, according to a median of 73 economists surveyed, with estimates ranging from 46 to 55.5. Likewise, the index of consumer expectations for six months from now, which more closely projects the direction of spending, dropped to 60.6, the lowest since March 2009, from 69.8.

According to the Gallup Poll, Americans' economic optimism declined from 41% at the beginning of May to 30% in mid-July. Weekly trends in economic optimism that Gallup has measured over the past three months are surprisingly similar to those of a year ago. Gallup reports consumers are no more optimistic now about the future course of the economy than they were when the economy was just beginning to recover from its late 2008 and early 2009 plunge and as companies were aggressively shedding jobs.

...and despite all these negative readings from surveys and polls, the S&P rallied almost 7% in July, the highest one-month rise since July 2009.

In my last posting, I reported our US Sentiment Index rose for 3 consecutive months signaling an improving mood in the market for July. Indeed, the US stock market, a barometer of the general mood about the economy, recovered about half the ground lost since the end of April, contrary to data from some of the most popular sentiment and confidence indexes.

For the fourth consecutive month, our US Sentiment Index rose modestly signaling an improving U.S. market. For July, the index rose above 80 for the first time since September 2006, hitting 84. The US Sentiment Index is up from 77 in June.


FIGURE 1: US Sentiment Index vs. S&P500 Cumulative Returns

The recent increase in the US Sentiment Index is supported by improving news in July for nine out of ten sectors. Over the past 3 months, the strongest build up in sentiment continues to be on the Utilities Sector even though it experienced a slight drop in July. This is followed by Financials and companies providing Basic Materials. Although still positive, the sentiment improvement around Consumer Goods and Technology companies continues to be the lowest.


TABLE 1: Sector ranking based on 90-day sentiment changes (As of July 31, 2010)

The US Sentiment Index is determined by in-depth analysis of news coverage on companies comprising the S&P 500. Using RavenPack's proprietary news analytics technology, the US Sentiment Index examines the language and events disclosed across thousands of news articles in real-time. This timely analysis captures the sentiment conveyed on stocks before investors fully digest it.

Where perhaps confidence surveys and polls are more explanatory in nature, new and innovative ways to capture market sentiment are coming from news information - what drives our mood and investment decisions.