Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Consumer spending: Leading indicator for stock markets? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jul 17, 2012

    Consumer spending: Leading indicator for stock markets?

    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

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)