The Age of Elusive Reality

The Age of Elusive Reality

As a teenager, I remember reading this quote and rolling my eyes at yet another person lamenting sad state of the youth:

“The children now love luxury; they have bad manners, contempt for authority; they show disrespect for elders and love chatter in place of exercise. Children are now tyrants, not the servants of their households. They no longer rise when elders enter the room. They contradict their parents, chatter before company, gobble up dainties at the table, cross their legs, and tyrannize their teachers.”

Some of the wording is a little strange. It sounds like it was written in a different age, perhaps the Victorian era. What’s stunning is that this was said by Socrates 2400 years ago.

Humans don’t really change much over time. Every generation goes through the same rhythms of life. We tend to think that life “today” has never been like this and the past is better than the present.

These days there is much talk about this apparent new reality where people don’t agree on what reality is. Regrettably, humans believing untrue things, regardless of evidence, are hardly new. False information is as old as true information.

It is one thing to commiserate about the frustrations of the day at a 4th of July barbeque, but when it comes to investing, believing untrue things can cost you money. Perception is never reality.

Each month, the University of Michigan publishes their consumer sentiment index. The index surveys random households for how they feel about their own financial situation, along with their short-term and long-term expectations about the general economy. As of May 2021, this index stood at 82.9.

Let’s give some meaning to this number:
In April 2020, when the pandemic ground the world to a halt, this index went down to 71.8.
In November 2008, during the worst of the Financial Crisis, this index went down to 55.3.
The all-time peak of the index was in January 2000 when it hit 112. This was in the context of the Dot Com Boom and when the hysteria about Y2K proved to be wrong.
A more recent peak was in February 2020, when the index hit 101. At the time, unemployment was at a multi-generational low and the stock market setting ongoing records.
Right now we are at 82.9, which is almost the exact mid-point between the highest the index has been and the lowest.

However, when you split this number between those who identify as Republicans, Democrats or Independent, we can see the starkly different perceptions. For May 2021, these were the numbers:

Consumer Sentiment Index 82.9
Index if Democrat 102.5
Index if Independent 80.3
Index if Republican 63.8

This means that right now, the sentiment of the average Republican is worse than the average sentiment of all Americans when the world was in lock down in April 2020.

We can see that during the Trump presidency, the exact opposite was true. Democratic sentiment was very dismal the entire time, while Republican sentiment was normally well beyond average sentiment during the Dot Com Boom.

This disparity in perception is quite stunning because we all live in the same country. One would expect that while expectations may be low if you don’t like who’s in charge, reality would eventually be persuasive to your sentiment.

We can see this over time in the animation below. Predictably, we can see those identifying as Independents closely mirrors average consumer sentiment. However, take note of how the red and blue lines sharply reverse when there’s a political change.

At some level, this shouldn’t be surprising. What should be surprising is how vastly different perceptions have become.
During objectively strong economic times, half the country has the consumer confidence you would expect during a deep recession.
During objectively bad economic times, half the country feels like it’s greater than the one of the strongest growth eras in our country’s history.

Neither group is any less guilty of their tribal misassessments. The most interesting part of this chart is the few months around the 2020 election. Overall sentiment didn’t change, but Republicans and Democrats switched places and these offset each other exactly.
At GreenStar, we aim to be non-political and seek to have perspective on issues and individuals rather than political party labels. A key motivation for this is that we can see how much tribalism can cloud perception.