While the stock market reached new highs in May, many Americans felt less confident about the economy. The University of Michigan Consumer Sentiment Index, which measures how people feel about their finances and the economy, fell to its lowest level in more than 70 years.

The good news is that the stock market has often performed well after consumer confidence reaches very low levels. Historically, the S&P 500 has produced strong gains in the year following these low points. Other measures of economic health, such as job confidence and small business optimism, remain closer to their long-term averages.

Still, the low level of consumer confidence could be a warning sign. Americans have continued spending money despite concerns about the economy, but several factors may cause consumers to cut back later this year.

One concern is inflation. Higher energy prices, partly caused by tensions in the Middle East and concerns about oil shipments through the Strait of Hormuz, have pushed prices higher. While many households received larger tax refunds this year, much of that extra money may have been spent on higher fuel costs, especially for middle- and lower-income families. As those refunds are spent, we may get a better picture of how rising prices are affecting household budgets.

Another concern is that Americans are saving less money. The personal savings rate recently fell to a three-year low of 2.6%, meaning people are spending more than 97% of their take-home income. While consumer spending has helped support the economy, it may not be sustainable if families continue relying on savings or credit cards to cover expenses.

In addition, the number of people falling behind on loan and credit card payments has been increasing. We will continue monitoring this trend, especially as the effects of tax refunds fade and uncertainty in global markets remains.

Despite these concerns, the stock market had a strong month. The S&P 500 gained 5.3% in May and is up nearly 20% since its March low. Bonds produced modest returns, while interest rates moved higher. Oil prices briefly rose above $112 per barrel before settling closer to $100.

As always, market conditions can change quickly. Staying focused on your long-term financial plan remains the best approach during periods of uncertainty.

Please contact us if you have any questions or would like to discuss your portfolio.