Consumer sentiment suddenly crashes below early-pandemic levels

New York(CNN Business) Americans are extremely worried about the Delta variant and the spike in Covid-19 cases. A key survey of consumer confidence plunged in August below where it was in April 2020 when the first Covid-19 outbreak slammed the brakes on the US economy.

The University of Michigan said that its influential consumer sentiment index plunged 13.5% from July to August and hit a level of 70.2. That's the most bearish reading for this measure since December 2011.

The drop was so precipitous since last month that the University of Michigan has recorded only six bigger monthly drops in the index's nearly 50-year history, including a more than 19% plunge in April 2020 and 18% drop in October 2008 during the height of the Great Recession and Global Financial Crisis.

"There is little doubt that the pandemic's resurgence due to the Delta variant has been met with a mixture of reason and emotion," said Richard Curtin, the surveys chief economist.

"Consumers have correctly reasoned that the economy's performance will be diminished over the next several months, but the extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end," he added.

Stocks were flat Friday, despite the huge slide in sentiment, and remain near all-time highs thanks to strong earnings.

There is a bit of a disconnect between the current economic data and Wall Street outlook, which are far rosier, and the apparently intense fear of the immediate future on the part of consumers.

The government reported last Friday that nearly a million jobs were added in July, the biggest monthly gain in nearly a year. And the unemployment rate fell to a pandemic-era low of 5.4%.

But the yield on the 10-Year US bond slid from about 1.37% to 1.3% Friday as nervous fixed income investors sought the safety of stable government debt. (Bond rates fall when investors are buying more bonds.)

Consumers reacting to gloomy headlines even as stocks pop

One market strategist called the August consumer sentiment numbers a "knee jerk reaction" to negative headlines about the Delta variant. But he understood why consumers are so gloomy.

"There is a sense among consumers that the rug has been pulled out from under them," said Thomas Simons, money market economist with Jefferies, in a report.

"The promise of vaccines and a return to something at least resembling pre-COVID 'normal' has shifted towards concerns that fear of being sick, masks, social distancing, virtual/distance learning, work from home, an endless stream of booster shots and seeing relatives through glass will instead be the norm going forward," he said, adding that "consumers are just plain sad."

Still, consumer sentiment can be remarkably fickle. Emotions can shift on a dime.

"What you feel like is different than what you actually do," said Randy Frederick, managing director of trading and derivatives at Charles Schwab, noting that consumer confidence is notorious for having many "pendulum swings."

The Conference Board reported last month that global consumer confidence hit a new all-time high during the second quarter.

And consumer confidence is not exactly the most reliable future indicator of what's next for the economy. Sentiment tends to follow news headlines and the state of the stock market.

Consumers have notoriously been way too bullish just before economic or market meltdowns. That was the case in January 2000. Consumer confidence hit a then record high just as tech stocks were about to implode. Sentiment was also at a high level in 2007 before the housing market crashed.

So it stands to reason that consumers may also be worrying too much that the economic sky is falling.