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There is always uncertainty when it comes to the stock market. But there are some things investors can do to try to demystify stock price movements.
One of them is to pay attention to the main key economic indicators. And this week an important one will arrive from the United States.
Consumer sentiment
The latest update to the Michigan Consumer Sentiment Index will be released on Wednesday. It should give investors a key insight into how American consumers think about their finances.
Michigan Consumer Sentiment Index 2020-2025
Created in TradingView
The index is made up of survey results from 500 households and is published monthly. Just as important as the total number is the direction in which it moves.
In general, when consumers feel more positive, they are likely to spend more. And when they are more cautious, the opposite happens.
Based on the results, investors like me can get an idea of what might happen in the near future. But reading must be done carefully.
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There are two reasons why reading consumer sentiment is important. One is that a weak outlook can cause stock prices to fall, which can create buying opportunities in two different ways.
If a drop in spending is likely to be temporary, long-term investors might consider buying shares of companies that are able to withstand short-term challenges before emerging stronger. This is an idea.
Alternatively, if a stock falls because the market overestimates how willing consumers are to cut back on its products, it could be undervalued. This could create an opportunity for investors to consider.
The other reason reading is important is that it can help predict when companies in a cyclical downturn are likely to recover. And this doesn't just apply to US stocks.
dr martens
dr martens (LSE:DOCS) are UK shares. It has fallen on hard times in recent years and much (though not all) of it is due to weak consumer spending in the US, which accounts for 37% of sales.
The share price has begun to recover, recovering 50% from its 52-week lows set in September. But unless things start to improve in the underlying business, there is a real risk that this will be short-lived.
The firm has made progress in correcting its own errors, in terms of inventory and distribution. And while it has restarted its marketing to try to drive demand, there are some things it can't control.
That's why I closely follow the data on US consumer confidence. It could be a good indicator of whether the business is headed toward recovery or whether the stock needs to continue falling.
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I'm not saying that a strong consumer sentiment update alone is a reason to buy Dr Martens – or any other stock. But I do think that being aware of what's going on can be helpful in understanding the stock market.
That's why I'll be watching this week when the latest data comes out. Given that around 68% of the US economy comes from consumer spending, I'll be looking at it for a lot more than just Dr Martens.
