What are the Investors and Consumers Cooking-up for the Economy?

Consumers create demand and investors risk their capital as investment in companies catering to demanding consumers. Well, risk is always there, and for making sound investment decisions, you need to take cues from Investor activity as well as Consumers activity. Being the basic pillars of an economy, Investors and Consumers impact the demand and supply scenario in numerous ways.

For understanding the impact of consumer activity on the overall economy and the stock markets in particular, you would first need to measure it. Consumer activity has a direct impact on corporate profits, and if measured properly, it can work as a reliable indicator for making timely investments. There are different aspects which influence the consumer activity and there are several ways of measuring it.

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Latch on to Consumer Confidence Index

Measuring consumer confidence is one of the most significant ways. Consumer confidence can be determined through various ways in which one can examine what the consumers feel about their economy and what is their view on economic prospects in times ahead.  A consumer would logically spend more when he is confident and less when he is not. So, there is a tendency that the stock prices impinge on the future opinions that the consumers hold today. The most reliable way to measure prevailing optimism among consumers in US is through official Consumer Confidence Index   (CCI). Retail sales are another measure, where the retail sales hit historic peaks when the consumer confidence level is high.

Can they afford a New Home?

Another crucial indicator of consumer confidence in an economy is the demand and pricing in housing market. There are several indicators which give rational results even when housing is a highly localized activity and it is difficult to determine it on a national basis. The level of activity in the housing market can be determined by going through the monthly releases and examining the housing starts, building permits, and new home sales. Investors monitor them regularly in conjunction with other indicators such as the S&P/Case-Shiller Home Price Index which examines changes in home prices in the 20 large American cities. By conducting research using these market reports, market participants can easily infer if consumers are intending to make big purchases or simply saving on anticipation of difficult times ahead.

Don’t Ignore Investor Sentiment

One has to invest prudently as it all depends on the investment strategy. Therefore, knowing the sentiments of investors whether retail or institutional, is a must watch for clear take on direction of the market. There are various indicators available. Some of them are published by big investment firms or research firms, which periodically keep a track of the market concord through investors’ polls. Often, renowned and successful people are interviewed by press and other media and their take on the markets and economy can provide useful insights for a layman investor.

US financial markets also attract overseas investors and their importance cannot be overruled while measuring investor sentiment. For a close idea of foreign investor sentiment, one can track activity of foreign central banks in US treasuries.

However, as the global financial markets are growing complex and interdependent, there is a dire need for a global investor sentiment index.

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