The ASX stock market has seen its share of pain over the last two years due to elevated inflation and higher interest rates. Households have been feeling pessimistic, but the latest Westpac Banking Corp (ASX: WBC) consumer sentiment survey may mean there are better times ahead.
Aussie household mood improves
The Westpac-Melbourne Institute Consumer Sentiment Index rose 2.9% to 82 in October, up from 79.7 in September.
Why are households feeling more positive even though interest rates remain high? Westpac suggested that the extended RBA pause on rate hikes might be helping improve the picture for households with a mortgage, with "an expectation that cost-of-living pressures will ease" in 2024.
The increases in the minimum wage and award rates, as well as the adjustment to welfare rates and improved interest returns for retirees are helping cushion against the cost increases. This can mean more money to spend at the tills of ASX shares.
Westpac also noted that the most promising shift was around an assessment of 'time to buy a major household item', which saw an improvement of 7.6% in October. But, it noted there have been false starts before, including the 9.5% rise in April that unwound in the months that followed.
Still feeling pessimistic
While October represented an improvement from September, the reading of 82 was still "very low" and in "deeply pessimistic territory". There has been a consistent decline in per-person spending since late last year.
Westpac noted, "while there are some faint glimmers of hope around family finances and the outlook for jobs, these are being overshadowed by still high inflation and renewed rate rise concerns."
Consumers are wary of the potential for more rises in the months ahead, with around two-thirds of respondents expecting another hike in the next 12 months.
Why this could be good news for ASX shares
ASX share prices are meant to reflect the outlook for businesses, with a focus on the medium-term, not just what's going to happen in the next few months.
If investors can see that the worst is over, or there's an end date in sight, the market may decide that share prices have fallen far enough and start a recovery.
If enough households are worried about an economic downturn and choose to limit their spending, that could in fact cause a negative spiral and act as a self-fulfilling prophecy.
Plenty of ASX retail shares have suffered share price declines over the past couple of years such as Wesfarmers Ltd (ASX: WES), Nick Scali Limited (ASX: NCK), Adairs Ltd (ASX: ADH), Universal Store Holdings Ltd (ASX: UNI) and Premier Investments Limited (ASX: PMV). This could mean that conditions may improve.
Time will tell if consumers' confidence grows even further, or if it's another false start.
