Americans Are Gloomier Than at Almost Any Time on Record, Michigan Survey Shows

Consumer sentiment in the United States has reached a concerning low, as indicated by the University of Michigan's consumer sentiment index, which recorded a score of 48.0 on October 23, 2026. This figure is close to the lowest recorded in nearly 70 years, with only the May 2026 reading of 44.8 being lower. Despite this pessimism among consumers, retail stocks have shown resilience, achieving significant gains in recent months. The disparity between consumer mood and retail stock performance will be crucial for investors as the holiday shopping season approaches.

The SPDR S&P Retail ETF (NYSEARCA:XRT) experienced a monthly increase of 6.76% and a year-to-date rise of 3.48%, although it dipped 1.65% to $87.65 on the day the sentiment index was released. In contrast, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) fell by 0.52% to $759.97. The retail sector's decline was more pronounced than the broader market, aligning with a survey that indicated a significant decrease in spending on large purchases.

As the holiday season draws near, the primary concern for investors is which indicator, consumer surveys or market prices, will more accurately reflect household spending trends. The final October sentiment index was adjusted upward from an initial estimate of 46.3, which was also the consensus forecast. This latest figure is nearly on par with September's 48.1, which ranks as the third-lowest reading in history. It also marks a five-month low and is below the readings from October 2025 (53.6) and June 2022 (50.0), the latter being the lowest prior to this year.

Joanne Hsu, director of the Surveys of Consumers, noted that sentiment has declined by 10% compared to a year ago and is down 15% from February, just before the onset of the Iran conflict. The current-conditions index fell to 46.7 from 50.9, marking the second-lowest level recorded, just above May’s 45.8. However, the expectations index saw a rise to 48.8 from 46.3, with the initial current-conditions reading of 44.7 being the lowest before its revision.

The drop in the current conditions subindex was attributed to deteriorating buying conditions for durable goods, which include items such as cars and appliances. Hsu explained that purchasing conditions for these goods fell by 18%, largely due to rising interest rates and affordability issues. The retail ETF's components, particularly auto dealers, parts suppliers, and electronics retailers, are heavily reliant on these sales.

Inflation expectations have also increased, with year-ahead expectations rising to 4.7% from 4.6%, and long-term expectations climbing to 3.5% from 3.4%. These represent the highest figures since May. Following a 25 basis point interest rate hike by the Federal Reserve in September, which marked its first increase in three years, the Fed is set to make another decision on rates on October 28.

Hsu emphasized that consumer perceptions of purchasing power continue to heavily influence views on the economy. While sentiment improved among Republicans and Democrats, it declined among independents ahead of the November 3 midterm elections. Although year-ahead business conditions showed a 14% improvement, they still remain 16% lower than the previous October.

Jim Baird, chief investment officer at Plante Moran Financial Advisors, remarked earlier this month that consumers across political lines are expressing frustration over rising prices and a sense of financial stagnation. Nevertheless, retail sales for September reached $745 billion, reflecting a 0.8% increase from August and marking the highest figure in a year. This phenomenon highlights a common trend where consumers express negative sentiment while continuing to spend, which could explain the recent rally in retail stocks.

Despite this positive retail sales data, discretionary retailers may face challenges, as many consumers finance purchases of cars, furniture, and electronics. Thus, increased interest rates combined with weak demand for durable goods could adversely affect sales in these sectors.

The XRT's equal weighting of its holdings leaves it vulnerable to weaknesses in the durable goods market, as many of its positions account for only 1% to 2% of net assets. Consequently, smaller auto dealers, apparel outlets, and specialty stores carry similar weight to discount and grocery retailers, which tend to perform better during economic downturns. The recent rally in retail stocks appears to anticipate a strong holiday shopping season, even as households reduce spending on larger items. SPY has less exposure to this risk due to its larger stakes in technology firms, which are less affected by consumer purchases of durable goods.

The upcoming initial November reading is scheduled for November 6 at 10 a.m. ET. If conditions for durable goods purchases improve and the Fed decides to maintain interest rates on October 28, the current analysis may need to be reconsidered. Conversely, if XRT drops below $82.10, its level from a month ago, it would indicate a shift in market sentiment.

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