For all the diverse forces currently influencing the United States stock market—ranging from artificial intelligence advancements to renewed tariff uncertainties and geopolitical tensions—the fundamental health of the American consumer remains a pivotal factor in determining whether the S&P 500 index will break out of its recent trading range.
The Challenge of Gauging Consumer Health
The difficulty lies in accurately assessing consumer well-being. Sentiment surveys have persistently reflected gloom for months, yet spending and income data continue to demonstrate surprising strength. This contradiction stems partly from a societal bifurcation, where affluent Americans benefit from robust investment portfolios and rising home values, fueling their spending, while lower-income consumers face ongoing financial struggles.
Wall Street's Search for an Edge
This ambiguity has prompted Wall Street professionals to seek innovative methods to gauge consumer behavior and its market implications. Jim Paulsen, a seasoned investment industry veteran and Substack writer, has identified a somewhat unconventional barometer known as the Poor-Rich Indicator. This tool reveals emerging signs of economic concern among top-tier consumers, as the gap between how wealthy households perceive the economy compared to lower-income households begins to narrow.
Historical Patterns and Market Implications
Paulsen notes that over the past five years, whenever this narrowing has occurred, U.S. stocks have consistently experienced short-term gains. He attributes this pattern to increased likelihood that policymakers, whether at the Federal Reserve or elsewhere in Washington, will take decisive action to bolster economic growth when even wealthy households express worry.
"It functions as a contrarian indicator, but it carries substantial weight because it suggests that growing numbers of people are adjusting their behaviors and attitudes, which ultimately drives change," Paulsen explained in an interview. "When multimillionaire households display concern, policy officials tend to become more proactive, and the public becomes more receptive to economic stimulus measures."
How the Indicator Works
Paulsen's gauge combines survey data from Morning Consult regarding economic confidence among lower-income versus higher-income households with the relative performance of Walmart Inc. shares against a luxury retail index. This effectively measures whether sentiment is improving more rapidly among budget-conscious consumers than among affluent ones.
"In the short term, when the indicator spikes rapidly as it is now, that has typically signaled favorable conditions for the stock market relatively soon," Paulsen emphasized.
Historical Context and Investment Insights
According to Paulsen's analysis, sharp spikes in this "poor versus rich" indicator have historically coincided with attractive entry points for equities, including around significant market downturns in 2018, 2020, and 2022. The recent surge since late last year is comparable in magnitude to those previous market turning points.
However, Paulsen cautions that the indicator should not be used as a standalone trading signal but rather as a complementary component to broader market-sentiment analysis.
Upcoming Consumer Data and Market Outlook
Fresh insights into consumer health will emerge in the coming weeks through earnings reports from major retailers including Target Corp., Home Depot Inc., and Lowe's Cos., along with the Conference Board's sentiment reading. Earlier this week, Domino's Pizza Inc. reported stronger-than-expected comparable sales growth, indicating consumer attraction to budget-friendly options.
While Friday's Supreme Court ruling that disrupted former President Donald Trump's tariff regime won't be reflected in these reports, retail earnings should provide executive commentary on how companies perceive the evolving trade policy landscape. Walmart's recent results struck a cautious tone, and the University of Michigan consumer sentiment index published Friday fell short of expectations, largely due to pessimism among lower-income consumers.
This complex interplay between consumer sentiment, policy responses, and market performance continues to shape investment strategies as analysts monitor whether the S&P 500 can indeed break free from its current range based on these underlying economic dynamics.
