A Few Short Stories

The Rich have lost hope, it's been a LOSERS' decade, and what a Tech Run!

I just have a few short stories to tell with my latest missive. Hopefully, it will give you some things to ponder as you consider the stock market today.

The Rich Have Lost Hope … Which is Good for the Stock Market!

It’s hard to understand considering the economy has not been in a recession for more than five years, inflation is only 2.7%, and both the stock market and corporate profits are at record highs. Nonetheless, rich Americans have lost faith in the future.

Chart 1 shows the University of Michigan’s Consumer Sentiment Index for the wealthiest 25% less the consumer sentiment index of the poorest 25% of Americans. Last September, sentiment among the rich was more than 23 points higher than among the poor, but in June, sentiment among the wealthiest is now nearly on par with how the poorest are feeling. Just since year-end, wealthy sentiment has collapsed from about 84 to only 56 leaving pessimism among both rich and poor more pronounced than just about any time since these statistics were first reported in 1979.

While pessimism overall is certainly pronounced today, what is important for stock investors is how pessimistic the rich are today relative to sentiment among the poor. As shown in chart 1, sentiment among the rich is only 3.3 points better than the poor which is lower than 98% of the time since 1979. Indeed, in only two quarters since 1979, has the level of consumer sentiment among the rich been less than poor sentiment, but today the rich again are close to feeling worse than the poor.

Why is this good for stock investors? Look at the lows in this confidence differential going back to 1979. Each of them marks what would have been a fabulous time to buy stocks – 1980, 1993, 2002, 2009, 2012, 2020, and 2022. And, here again in 2025! For obvious reasons, the poor are frequently pessimistic but when the rich throw in the towel, it’s the ultimate contrarian buy signal. As Warren Buffet says, you should buy when nobody is buying -- and this is particularly true when the rich become fearful and stop buying. As demonstrated on the chart, since 1979, buying the S&P 500 from the lowest quintile readings results in a forward 1-quarter average annualized total return of 19.53% compared to a 12.78% total return in the middle three quintiles, and only a 9.63% total return from highest quintile readings.

Admittedly, it’s odd to have this confidence differential be so low when the stock market is at a record high. Past lows generally were when the S&P 500 was close to bear market bottoms. Nonetheless, the collapse in sentiment among the wealthiest is a “bullish” sign for the stock market which should be considered alongside your bearish concerns.