Investing Insights

CONSUMER SENTIMENT WATCH  •  September 28, 2026  •  Jon Wolfenbarger

Why 5% Bond Yields Are Creating Two Americas And Two Stock Markets

BEVERLY HILLS, CA — Stocks rose last week, but the University of Michigan's Consumer Sentiment Index for September came in at 48.1, down from 51.7 in August and 55.1 a year earlier. Americans are telling us, loudly and across party lines, that they feel terrible about an economy that politicians and the Fed keep calling “strong”.

What Is Consumer Sentiment And Why Should We Care?

Since 1952, the University of Michigan has asked a sample of households a set of simple questions. Are you better or worse off financially than a year ago? Will you be better or worse off a year from now? What do you expect for business conditions over the next 12 months and the next five years? Is now a good time to buy big-ticket items like cars, appliances and furniture? The answers are combined into the headline index, which is benchmarked to 100 in early 1966. The index is split into two parts, Current Economic Conditions and Consumer Expectations.

Consumer sentiment matters because consumer spending accounts for roughly two-thirds of US GDP. The Expectations component is a proven leading economic indicator. The survey also asks households what inflation they expect, which is a number the Fed watches closely to determine policy. When people expect higher prices, they reduce their demand to hold money and ask for higher wages and buy ahead of price hikes. Those behaviors help turn inflationary expectations into reality.

September Sentiment Down Across the Board

The details of the September survey were as ugly as the headline. Current Conditions slipped to 50.9 from 51.9, while Expectations dropped 10.1% to 46.3. According to survey director Joanne Hsu:

“Consumer sentiment ticked down less than four index points in September, reaching the lowest reading in four months and down 15% from January 2026. Views of current and year-ahead expected personal finances both weakened about 10% this month, with concerns over high prices continuing to climb. Buying conditions for durables improved a bit, in part due to a perception that completing such purchases now would help consumers avoid higher prices in the future. The short-run outlook for business conditions plunged amid renewed worries that elevated fuel prices and re-escalating trade disputes could pass through to the economy as a whole. Overall, interviews reveal broad agreement across the political spectrum that the outlook for the economy has weakened since the beginning of the year. After particularly large declines in sentiment this month, Republican sentiment is now 20% lower than January 2026; Democrats are down 13% over the same period.

Year-ahead inflation expectations jumped from 4.0% last month to 4.6% this month, the highest reading since June. The current reading substantially exceeds the 3.4% seen in February before the Iran conflict began, along with all 2024 readings. Long-run inflation expectations ticked up to 3.4%, ending three consecutive months at 3.3%. These expectations remain higher than their 2024 range of 2.8% to 3.2%.”

The one bright spot is really a warning sign. Buying conditions for durables improved partly because consumers believe buying now helps them avoid higher prices later. That is textbook inflationary psychology: spend your dollars before they lose more value. Inflation is a bipartisan issue, thanks to the Federal Reserve that is “independent” of politics. Haha.

How Bad Is Sentiment On A Historical Basis?

About as bad as it has ever gotten. Before this decade, the low point was 51.7 in May 1980, when inflation was running in the double digits and the prime interest rate was near 20%. But then the June 2022 reading of 50.0 broke that record. Then 2026 broke 2022. Sentiment hit an all-time low of 44.8 this May, below every reading in stretching back to 1952. That includes the 1970s stagflation, the Great Recession and the Covid-19 pandemic. All four of the worst readings on record have come in the past six months.

For perspective, the index peaked at 112.0 in January 2000, and its long-run median is around 88. Today's 48.1 is 45% below normal. Americans feel worse today than they did during the Volcker-era double-digit inflation, the 2008 financial crisis and the Covid lockdowns. That’s bad.

Inflation Feelings: Consumers Aren't Wrong

The survey showed year-ahead inflation expectations jumped from 4.0% to 4.6%, the highest since June and well above the 3.4% reading in February before the Iran War began. Long-run expectations rose to 3.4%, above their 2024 range of 2.8% to 3.2%.

Are consumers being irrational? We don’t think so. Let’s look at the facts. Headline CPI held at 3.4% in August. Energy prices were up 16% from a year ago and gasoline was up 27%. Diesel prices have risen about 90% this year to all-time highs, as shown below. The producer price index was running at 5.4% annually. The price index for gross domestic purchases rose at a 5.8% annualized rate in the second quarter.

The politicians’ favorite inflation metric is core CPI, which eased to 2.4% in August. But core leaves out food and energy, which are the two things every household buys every week. It’s a very convenient measure for politicians.

More importantly, the rate of change in inflation is not what people feel. They feel the price level. With the CPI index at about 335, consumer prices are nearly 30% higher than in January 2020. That is the price of the 40% of new dollars printed out of thin air in 2020, which Jay “Transitory Inflation" Powell assured us would pass. It didn't pass. It compounded. As Milton Friedman put it, inflation is always and everywhere a monetary phenomenon. The war and tariffs just made it more visible.

Why Is Sentiment So Low If The Economy Is So Strong?

On paper, the economy looks fine. Payrolls jumped by 162,000 in August against a consensus of 53,000 and unemployment held at 4.1%. Consumer spending grew at an annualized 3.4% in the second quarter. Real final sales to private domestic purchasers rose 4.2%, the strongest in more than three years. The Atlanta Fed's GDPNow model puts third-quarter growth at 5.0%.

So why the misery? Several reasons stand out.

First, a strong nominal economy is not the same as a prosperous household. A big chunk of today's "growth" is inflation flowing through the numbers. The rest is concentrated in AI spending. Business investment in equipment has been growing at double-digit rates on AI spending, while investment in structures was expected to contract for a tenth straight quarter and residential investment for a sixth. Data centers are booming. Houses are not. Consumers feel that.

Second, borrowing costs are crushing Main Street. The 30-year fixed mortgage rate has reached 7.03%. Car loans, credit cards and small-business loans have all repriced higher. And the Fed is making it worse, not better. The Fed delivered its first rate increase in three years in September. The market is pricing roughly a 67% chance of another hike in October. Governor Michael Barr said "further policy adjustments are likely to be needed." How insightful, guvnor.

Third, the labor market is weaker than the headline suggests. The labor force participation rate ticked up to 61.6% in August but is still down half a point since January. And as always, the BLS (or should we call it the BS?) will revise these numbers, so no single print deserves too much faith.

Fourth, and most fundamentally, is who gets the new money from the Fed first. Newly created money doesn't reach everyone at the same time. It flows first to big corporations that borrow from banks and asset owners. Those people enjoy free money and rising stock prices, while everyone else pays rising prices at the pump and the grocery store. That's why Wall Street can party while Main Street can't pay rent. It's also why this intervention cascade keeps repeating. Money printing in 2020 caused inflation. Inflation forced rate hikes. Then came rate cuts, war spending and tariffs. Now inflation is accelerating again, as we have predicted, and the Fed is hiking once more, chasing a bond market that has already moved in sync with reality.

An Index Bull Market With Most Stocks Falling

The same split shows up in the stock market. The S&P 500 remains near its record highs, led by technology and communications. But under the surface, nine of its 11 sectors were down in September. The equal-weight S&P 500 fell about 4% for the month, and financials and utilities each lost more than 5%. This chart shows the S&P 500 (black line) is near its all-time highs, while the median stock (red line) is down 8% over the past six weeks.

This is a narrow index bull market hiding a broad stock selloff.

A key reason is 5% bond yields. Large AI beneficiaries can tolerate high rates because their earnings growth is extraordinary and their balance sheets are strong. But small companies, utilities, regional banks and indebted businesses can't escape higher funding costs as easily. They have to borrow at the market's price. The market's price just hit a 19-year high.

That's why the Russell 2000's decline, in a week when the Nasdaq gained 2%, matters more than the S&P 500's headline gain. Investors aren't betting on a broad economic boom. They're crowding into the handful of businesses they believe can overpower the jump in the discount rate. Narrow leadership has a history and it's not a comforting one. Markets led by a shrinking group of giants tend to be fragile, such as we saw in the early 1970s with the Nifty Fifty.

Investment Implications

To recap the current situation:

• Consumer sentiment is near the lowest level in 74 years, and inflation expectations are rising again
• Headline CPI is 3.4%, gasoline is up 27% and producer prices are up 5.4%
• The Fed has resumed hiking and the 10-year yield is near 5.2%
• The S&P 500 is near a record while the average stock has been falling

For stock investors, the index isn't the market. Favor companies with strong cash flow and little debt. Be cautious about small caps, regional banks, utilities and heavily indebted businesses as long as yields keep rising.

Gold and silver remain our preferred hedge against stagflation and against a government whose only politically tolerable policy is more inflation.

Consumers aren't gloomy because they misread the economy. They're gloomy because they read their shopping receipts.