Talk about a split. It was clear in the post-election world that the typical divide between US voters was far wider than it had been before. Now, there is the data to quantify it in the most recent release of a consumer sentiment survey by the University of Michigan. At a headline level, the confidence of US consumers weakened at the margin from January’s 13-year high. This is not terribly surprising as there is an ebb and flow of optimism/pessimism at driven by the dominant issue of the day. Today, as we all know well from being bombarded by media of every type, government is the tone-setter. What is most interesting within the report, however, is the measurement of how much mind-share government policy is taking and the gap between fellow citizens. In this survey, there is not a specific question about politics; instead respondents are asked to comment in their own words about how they feel about their personal situation and the economy generally. A full 60% wrote in government into their response, whether good or bad. That is a significant level not seen since the “fiscal cliff” days of 2013/2014. In addition, there is a near-record divergence between the Democrats (near historic lows) and the Republicans (near historic highs) which would indicate that half the population thinks we are going into recession and the other half into expansion.
At this point, with little other than speculation regarding policy and its effects, the financial markets are absorbing the cycles of emotion and seem to be in “wait and see” mode. Inflation expectations implied in the fixed income market are coming down a bit from their “Trump bump” highs. However, equity markets seem to be mimicking the consumer sentiment split most closely. Specifically, we are looking at options on the S&P 500. The “price” of an option is often considered to be its volatility which on the S&P 500 is termed the “VIX.” Currently the VIX is below 11 which is about as low as it has been in a long time. The VIX is also sometimes the “fear gauge” because it spikes when the market is scared during a drawdown. The current low reading is indicating that the equity market is not expected to move quickly (which in turn can be interpreted to say that investors are complacent). That said, when you look a little deeper at pricing of the individual puts and calls there is a similar split as we saw in the consumer survey. Pricing of call options indicate an above average bullish sentiment whereas the put options imply above average bearishness. Only one of them is going to end up being right.