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Remember, remember: when consumers and economies tell different tales

As Bonfire Night celebrations begin across Britain, CIO Fahad Kamal’s monthly letter uncovers an intriguing plot unfolding on both sides of the Atlantic. 

Consumers report feeling decidedly downbeat, even as the harder data tell a more resilient story. What can that disconnect teach investors?

  • Unpicking the plot

Consumer sentiment in the US and UK remains unusually weak, but spending and other economic data tell a more resilient story. I look at what is driving this disconnect and why it matters for investors.

  • Looking beyond appearances

Sentiment and economic data can send conflicting signals. I explain why we consider both when assessing the investment outlook, and why changes in what consumers say do not always translate into changes in what they do.

  • Where our convictions lie

Our current investment views favour equities over government bonds, with a preference for emerging markets. We also see improving value in bonds and use selected alternatives to broaden diversification.

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs. This article should not be taken as advice.

This week, Britain remembers a plot old enough to make even a bank founded in 1692 feel relatively youthful. Closer to our own time, a rather different but no less intriguing plot is unfolding: the curious difference between how consumers are behaving and what they are saying.

Smoke without fire? Why US consumers feel worse than the economy looks

The US economy is the largest and most influential economy in the world, and more than two thirds of its activity is driven by consumer spending. Therefore, how Americans feel about their economic prospects has long been watched for clues as to what might happen next.

If we listened solely to what Americans are saying, we might conclude that the US economy resembles less a Guy Fawkes bonfire and more a pile of damp logs. The University of Michigan Surveys of Consumers, a closely watched indicator, found sentiment is meaningfully lower than at the depths of the global financial crisis, and the Conference Board Consumer Confidence Survey, a monthly household survey, tells a similar tale: in September, confidence fell to its lowest level since 2014 and, despite an uptick in October, remains on a broader downward trend.

Source: University of Michigan, Macrobond, Coutts. Data accurate as of 23/10/2026.

Such readings cannot simply be dismissed. Collapsing US consumer confidence foreshadowed the consumer-led downturn of 1990-91 and accompanied the historic contraction in spending during the global financial crisis.

Yet a closer look at today's figures suggests the woodpile may not be as damp as sentiment implies. The Federal Reserve Bank of New York’s Survey of Consumer Expectations found households feeling worse about their finances while simultaneously expecting their spending to grow at the fastest pace since May 2023. Meanwhile, their perceived risk of losing their job fell to its lowest since December 2024.

Feeling the heat: why economic resilience can still feel painful for consumers

Perhaps the contradiction is not quite as great as it first appears. Economic statistics measure an economy in aggregate, but consumers experience it personally.

Inflation is a case in point. A lower inflation rate means prices are rising more slowly than previously, not that they have fallen back to where they once were. The inflationary pressures of recent years therefore remain visible in supermarket aisles, restaurant menus and household bills. The inflation figures may tell consumers that the peak of pricing pressures has passed, but the day-to-day impacts remain.

This tension is not confined to the US. In the spirit of a week devoted to foiled plots, Britain’s economic narrative deserves a little interrogation of its own. UK consumer confidence fell sharply in October, recording its biggest monthly decline since the early months of the pandemic. Yet consumers’ behaviour suggests there may be more dry powder beneath the surface than sentiment would indicate. Office for National Statistics figures show that the UK economy grew 0.7% in the three months to August, its eighth consecutive three-month period of economic growth, while retail sales volumes also continued to rise. 

Source: GfK UK, Macrobond, Coutts. Data accurate as of 23/10/2026.

The International Monetary Fund, meanwhile, has described the UK economy as having “remained resilient”, even as higher energy prices weigh on its near-term outlook. The gap between what consumers say and how they behave, it seems, is not an exclusively US phenomenon.

That does not make consumer sentiment irrelevant. But it does raise a question for investors: when perception and behaviour part company, where should we look for the clearest signals on the economic outlook?

A twist in the plot: consumers are still spending

As this particular week in the British calendar reminds us, sometimes it pays to look in the cellar. In the case of the US consumer, what lies beneath headline sentiment readings is rather revealing.

US consumers have not retreated: the latest figures from the US Bureau of Economic Analysis show that consumer spending has grown at an annualised pace of 3.8% in the third quarter of 2026, after adjusting for inflation. Nor does the labour market suggest households are preparing for an imminent downturn. According to the US Department of Labor, new claims for unemployment benefits stood at 194,000 in the week to 24 October and remain near July’s low of 189,000 (the lowest since 1969).

Source: US Bureau of Economic Analysis, Macrobond, Coutts. Data accurate as of 15/10/2026.

There is another source of spending power that does not arrive in the monthly pay cheque: wealth accumulated in homes, investments and retirement savings. US central bank figures show that US household net worth reached $195.9 trillion in the second quarter of 2026, having risen by $12.8 trillion in just three months, primarily because of gains in equity markets. Relative to disposable income, household wealth now stands at its highest level on record. For households that own these types of assets, the household balance sheet tells a considerably more reassuring story than their income alone.

This does not mean that every US household is experiencing the same economy. Far from it. US Federal Reserve data show considerable differences in the composition and distribution of household wealth. As the US population ages, years of rising equity and housing markets have increased the spending power of older and higher-income households, which now account for a greater proportion of US household income and spending. This explains why aggregate spending has remained resilient even as some cohorts of the economy, particularly younger and lower-income households, have felt under pressure. It also suggests why surveys, which consider all consumers equally, may lead investors to overstate the impact of sentiment on spending.

Whatever Americans may be feeling, and telling the pollsters, aggregate spending has continued to advance. US consumers, on average, are spending like optimists and talking like pessimists.

Unpicking the story: using data to navigate fast-moving financial markets

There is a broader lesson here for investors. Financial markets rarely offer the luxury of a single, unambiguous signal. Sentiment, economic data and market prices can point in different directions, particularly during periods of uncertainty. The challenge is not to decide which one to ignore, but how much weight to give each.

Sentiment matters. It is forward-looking and can provide an early indication of how consumers may behave, while harder economic figures – although generally more reliable – often confirm a change only after it has taken place. But when sentiment and behaviour diverge as sharply as they have recently, investors should be wary of mistaking rumours of a plot for evidence that it will succeed.

We saw this clearly during the volatility surrounding Liberation Day in 2025, and during periods of heightened geopolitical uncertainty in the Middle East in 2026. Using the latter as an example, sentiment data suggested that higher oil prices would weigh on household budgets and cause consumer spending to retrench. But the evidence on consumer activity – including hard data such as restaurant spending – showed that this retrenchment was not happening. 

Source: US Census Bureau, Macrobond, Coutts. Data accurate as of 15/10/2026.

During both episodes, we looked beyond sentiment surveys and supplemented our usual indicators with an even broader range of hard economic evidence, as well as selected high-frequency indicators. This allowed us to test sentiment-driven narratives against how economies and consumers were actually responding. Together, these additional sources of evidence enriched our established investment process with information better suited to a rapidly changing environment. That discipline helped us to avoid reacting to misleading signals and remain positioned overweight for the economic and financial market recovery that followed.

Remember the fundamentals: our core investment views

We favour equities over government bonds

Positive economic growth, resilient corporate earnings and continued business investment support our preference for equities over government bonds, although we moderated the extent of that stance earlier this year. Within equities, we continue to favour emerging markets, which offer access to long-term opportunities such as AI, often at more compelling valuations than developed markets.

We are more selective elsewhere. Resilient earnings continue to support US equities, although demanding valuations leave less room for disappointment. In Europe outside the UK, attractive valuations and a diversified sector mix provide some support, but weaker price and earnings momentum and sensitivity to energy costs leave us cautious.

We see improving value in bonds, but remain underweight

The rise in yields has improved the balance of risk and return available from government bonds. We remain underweight government bonds relative to global equities, however, with above-target inflation and the potential for further interest-rate rises warranting some caution.

Bonds nevertheless continue to have an important role as a source of income and portfolio diversification, particularly as a potential hedge against recession.

We value alternatives to broaden diversification

If this month’s discussion has been about looking beyond a single signal, there is a natural parallel in portfolio construction. We do not build portfolios around a single economic outcome. Alongside equities and bonds, we continue to use selected alternative investments, where appropriate for our clients, to broaden diversification.

This includes retaining a modest overweight stance on gold, while liquid alternatives can provide differentiated sources of return when equities and bonds move more closely together. 

Evidence has the final word: what conflicting signals can teach investors

Although consumer sentiment should not be dismissed, a feeling about the economy is not the same thing as a change in the economy itself. The distinction matters when financial markets are moving quickly and narratives are competing for our attention.

For us, the response is to keep testing those narratives against what we can observe: how consumers are spending, what businesses are doing, what financial markets are pricing, and whether the underlying economic data are changing.

The US consumer is a case in point. Confidence is exceptionally weak, yet spending has remained resilient. That tension is not something we need to resolve neatly, but it is something we need to recognise and understand. The investment question is not which story sounds more convincing, but whether the weight of the evidence has shifted sufficiently to warrant a change in our view.

Our aim is to build multi-asset portfolios for a range of possible scenarios, rather than assuming every spark becomes a firework.

Yours sincerely,

 

Fahad Kamal 

Chief Investment Officer

The above article has been written and published by Coutts & Co.

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