Image source: Getty Images
There is always uncertainty when it comes to the stock market. But there are other things investors can do to try and limit the movement of share prices.
One of these is attention to key economic indicators. And there is something important from the US this week.
Consumer experience
On Wednesday, the latest update from the Michigan Consumer Sentiment Index is expected. It should give investors valuable insight into how US consumers think about their finances.
Michigan Consumer Sentiment Index 2020-2025
Created in TradingView
The list is made up of survey results from 500 households and is published every month. Just as important as the number is the way it moves.
In general, when consumers feel better off, they are more likely to spend more. And the more cautious they are, the opposite is true.
Based on the results, investors like me can get a sense of what might happen in the near future. But learning needs to be handled carefully.
Finding stocks to buy
There are two important reasons to study consumer sentiment. The first is that a weak outlook can cause prices to fall, which can create buying opportunities in several different ways.
If the decline in spending is likely to be temporary, long-term investors may consider buying shares in companies that will be able to withstand short-term challenges before they become stronger. This is one idea.
Alternatively, if a stock falls because the market overestimates how much consumers are willing to discount its products, it may be undervalued. This can create an opportunity for investors to consider.
Another reason the study is important is that it can help predict when companies in a cyclical downturn are likely to turn around. And this doesn’t only apply to US stocks.
Dr. Martens
Dr. Martens (LSE:DOCS) is a UK stock. It has had a tough time over the past few years and much (though not all) of this is due to weak consumer spending in the US, which accounts for 37% of sales.
The stock price has begun to pull back, recovering 50% from its 52-week low set in September. But unless things start to improve with the underlying business, there is a real risk this will be short-lived.
The firm has made progress in correcting its shortcomings, both in terms of innovation and distribution. And while it has restarted its marketing to try and increase demand, there are things it can’t control.
That’s why I keep a close eye on US consumer sentiment data. It can be a good indicator that the business is headed for a recovery, or whether the stock is still going to fall.
Finding stocks to buy
I’m not saying that a strong review of consumer sentiment is in itself a reason to buy Dr Martens – or any other stock. But I think knowing what’s going on can be helpful in understanding the stock market.
That is why I will pay attention this week when the latest information comes out. With about 68% of the US economy coming from consumer spending, I’ll be looking beyond Dr. Martens.
Source link
