Consumer spending: Leading indicator for stock markets? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  
  • Home
  • Outlook Arena
  • Jul 17, 2012 - Consumer spending: Leading indicator for stock markets?

Consumer spending: Leading indicator for stock markets?

Jul 17, 2012

We all know that consumer spending is directly related to the economy. When a country's economy is doing well, consumers have more disposable income to make purchases. Similarly, when there is an economic slowdown, consumers are likely to defer or cancel their major purchases.

However, what is even more interesting to examine is if, and how consumer spending eventually affects stock prices.

The "vicious cycle"

Private Final Consumption Expenditure (PFCE) is one consumer spending related component of the GDP (Gross Domestic Product).

When there is robust and growing consumer demand, company revenues increase, and they plan to ratchet up production. If profits are higher, stock prices may also rise. Correspondingly, in a slowing economy, revenues are weaker, and this is followed by more cautious and lower production plan. If the profits are lower, stock prices may fall.

In a weakening economy, if consumers perceive that their jobs to be in jeopardy, or if they are faced with rising inflation; consumers may have less discretionary income to spend, or they may spend less due to the risks they see.

Reduced company earnings can lead to cost cutting measures (including layoffs). Such corporate actions lower consumer confidence. When consumer spending and consumer confidence are low, corporate earnings can fall further (the "vicious cycle"), and this can result in lower stock prices. And, this phenomenon adds to economic woes.

As investors we can take cues from consumer spending patterns.

The graph below shows how consumer spending and corporate profits are related.

Source: RBI website, Ace Equity

Closely watching consumer spending trends can provide an important input into the movement of stock markets.

Sectors most affected by consumer spending

Automobile, Realty, and Retail - Car manufacturers track car sales, real estate companies focus on rental data, and retailers closely watch footfalls. They also study reasons for changes in consumer spending - increasing, reducing or deferring purchases. Consumer discretionary income falls when the economy is weak, and leads to fewer purchases of these items.

Capital goods requiring discretionary spending - In a slowing economy, discretionary spending on items such as refrigerators, air conditioners and washing machines is one of the first that gets deferred or reduced.

Banking and financial services - With a weak economy, consumers have lesser disposable income, and so are unable to save and invest as much as they would in a stronger economy. Reduced savings and fewer disposable funds for investment are likely to negatively affect the revenue of banks and other financial institutions.

Sectors that are least affected by consumer spending

Pharma - The Pharma sectors are less likely to be affected by any change in consumer spending. The items serve the basic needs of consumers, and so are essentially non-discretionary in nature.

FMCG - FMCG companies too are relatively less impacted by any slowdown in consumption expenditure. People will continue to use shampoos, snacks, detergents, cigarettes even if the economy is not doing too well.

So these sectors are considered to be defensive investment bets.

Consumer spending sheds some light ... but fundamentals are critical

Consumer spending trends do affect company profits. If these changes are greater than expected, then stock prices will also be impacted. So consumer spending trends do shed some "light" on sectors for investors. But only some light.

While this indicator provides important but broad guidance regarding stock markets, we still need to evaluate the fundamentals of individual companies to decide which one is worth investing in and which one is not. Also, consumer spending trends may be temporary and short term in nature.

So it is important to learn from consumer spending trends, but remember that in the long run, companies that have strong management, sound fundamentals and healthy financials will emerge as winners.

Equitymaster requests your view! Post a comment on "Consumer spending: Leading indicator for stock markets?". Click here!

1 Responses to "Consumer spending: Leading indicator for stock markets?"

Anupam Garg

Jul 17, 2012

consumer spending should be one of the weakest indicators of stock market trend...simply cos the degree of spending doesn't change a lot...the requirements of consumer are quite constant & r more determined by the lifestyle which he leads...of course, a sever recession or growth will impact the numbers anyway

however, spending habits stay more or less the same

Equitymaster requests your view! Post a comment on "Consumer spending: Leading indicator for stock markets?". Click here!

More Views on News

BSE Sensex Surges 600 Points; BAJAJ AUTO Among Top Gainers (Market Updates)

Oct 1, 2020 | Updated on Oct 1, 2020

The BSE Sensex Surged 600 Points; BAJAJ AUTO Among Top Gainers. Find the latest update, special reports and news on all time high gainers of BSE Sensex at

Nippon India Nifty Smallcap 250 Index Fund: High Risk in Passive Mode (Outside View)

Oct 1, 2020

PFN explains about the Nippon India Nifty Smallcap 250 Index Fund.

You Should Be looking for Small-cap Stocks that Will Rebound Strongly (Profit Hunter)

Oct 1, 2020

This single trait in excellent small cap businesses differentiates them from the rest.

This Number Will Give You an Edge Over Other Traders in the Market (Fast Profits Daily)

Sep 30, 2020

In this video, I'll share with you, a crucial number that I track everyday which gives me trading edge.

Is Mirae Asset Ultra Short Duration Fund a Right Solution for Your Short Term Needs? (Outside View)

Sep 30, 2020

PFN explains about the Mirae Asset Ultra Short Duration Fund.

More Views on News

Most Popular

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

I Believe These Stocks Will Deliver the Most Outsized Returns in 2021 and Beyond (Profit Hunter)

Sep 23, 2020

Rules of the racetrack can help you bag the biggest gainers of the coming decade.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Oct 1, 2020 02:29 PM