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There’s always uncertainty when it comes to the stock market. But there are some things investors can do to try and demystify movements in share prices.
One of these is paying attention to key leading economic indicators. And there’s an important one coming from the US this week.
Consumer sentiment
On Wednesday, the latest update from the Michigan Consumer Sentiment Index is due. It should give investors a key insight into how US consumers are thinking about their finances.
Michigan Consumer Sentiment Index 2020-2025
Created at TradingView
The index is made up of the survey results from 500 households and is published monthly. As important as the overall number is the direction in which it is moving.
In general, when consumers are feeling more positive, they’re likely to spend more. And when they’re more cautious, the reverse is true.
Based on the results, investors like me can get a feel for what might happen in the near future. But the reading needs to be handled with care.
Finding stocks to buy
There are two reasons the consumer sentiment reading is important. One is that a weak outlook can cause share prices to fall, which can create buying opportunities in a couple of different ways.
If a decline in spending is likely to be temporary, long-term investors might consider buying shares in companies that will be able to endure short-term challenges before emerging stronger. This is one idea.
Alternatively, if a stock falls because the market overestimates how willing consumers are to cut back on its products, it might be undervalued. This could generate an opportunity for investors to consider.
The other reason the reading is significant is it can help predict when companies in a cyclical downturn are likely to turn around. And this doesn’t just apply to US stocks.
Dr Martens
Dr Martens (LSE:DOCS) is UK stock. It’s had a difficult time over the last few years and a lot (though not all) of this is due to weak consumer spending in the US, which accounts for 37% of sales.
The share price has started to bounce back, recovering 50% from its 52-week lows set in September. But unless things start to pick up with the underlying business, there’s a real risk this will be short-lived.
The firm has made progress in fixing its own mistakes, in terms of its inventory and distribution. And while it has rebooted its marketing to try and boost demand, there are some things it can’t control.
That’s why I’m keeping a close eye on the US consumer sentiment data. It could be a good indication of whether the business is heading towards recovery, or whether the stock has further to fall.
Finding stocks to buy
I’m not saying a strong consumer sentiment update by itself is a reason to buy Dr Martens – or any other stock. But I do think being aware of what’s going on can be useful for understanding the stock market.
That’s why I’ll be paying attention this week when the latest data comes out. With around 68% of the US economy coming from consumer spending, I’ll be looking at it for much more than just Dr Martens.
