How Can Consumer Spending Be A Market Indicator?

While conducting research to make your next investment decisions it is important to remember that different markets can be examined using different market indicators. For those unfamiliar, market indicators are a series of technically derived indicators used by traders to try and forecast the direction that the financial indexes will be heading next. Further, most market indicators are produced through an analysis of companies that have reached new highs relative to the number that hit new lows — known as market breadth. In past articles, it has been mentioned that when you are learning how to successfully conduct research it might be a good idea to start with markets that you both understand and are familiar with. For instance, many of us enjoy shopping and have a general understanding of what the retail market is. As such, this article will explore how consumer spending (sale figures) might be functional as market predictors in this space.

Sales Figures From “Same Stores:”

This is perhaps the most basic measure that can be taken into account when looking for market indicators in the retail space. The term “same-store sales” simply refers to a measure of the change in sales over a specifically chosen period of time. Generally, these periods are year-to-year and cover all stores that have been open longer than a year. Of course, other metrics such as revenue and earnings per share (EPS) should probably be strongly considered too — as they are with nearly all investments. However, in the retail market, same-store sales are particularly important because stores that consistently generate great sales figures tend to provide the best stock performance over time.

Sorting Retailers into Groups:

It is no secret that the retail market is huge —given that it is made up of so many different retailers. Likewise, these retailers offer an equally large array of products and services. As such, to gain an understanding of the overall retail market, in addition to exploring specific segments, it could be a good idea to sort similar retailers into groups. For instance, “big box” stores such as Walmart, Home Depot, and Target might be in a group since companies of their size are key players in the market. That said, groups could also be made from smaller companies that share more niche segments of the market such as technology, clothing, or even especially specific things like greeting cards and candles. Ultimately, though, despite the big box superstores because a small segment —of a vast retail sector — they might make up the group that is most important to research given their sheer size. They could provide a decent look into the spending health of the United States economy.

Retail Aspects That Might Not Be Good Indicators:

As important as it is to know how some consumer spending habits can be market indicators, it is also beneficial to understand some that might not be. Further, not all retailers will provide data that is helpful in determining the health of consumers regarding their spending in the market. For example, companies that sell staple products (that many deem necessary for life) such as drug stores and basic grocery stores might not provide the best indicators because their products and services are needed despite economic conditions. To clarify, this does not mean that consumer habits regarding these types of stores are completely irrelevant, they just might not be as important as others mentioned above.

Through an understanding of general consumer spending and the ways in which it relates to retail, one can better define a good or bad economy. Moreover, catching economic trends in their early stages can present opportunities that are extremely valuable. Finally, since there is so much available information in this space, it might be a great direction to try and maneuver your independent research towards in the future!