DEMAND & Consumer Sentiment & Investor Sentiment - Fundamental Analysis For THe Global Stock Market

Fundamental Analysis Indicators and indexes help us to understand the drivers of markets (fundamental indicators). If the indicators are showing strength then we remain invested. If we see a weakening across the board of these fundamentals, only then should we think about selling.  

Consumer Sentiment

The University of Michigan consumer sentiment survey is probably the most often quoted measures of consumer sentiment. Going back to the 1970s readings of around 70 or below have coincided with recessions as shown by the grey shaded areas in the chart below...

• Retail Trade Sales Demand & Consumer Confidence

A downturn in heavy truck sales above is likely to be accompanied by a downturn in general Retail trade demand. The following chart from the Federal Reserve website shows this playing out before the dotcom crash (2000) and the GFC (2008)  

Bullish Retail and consumer confidence (at least on teh retail side) can be as much of a warning sign as a sign the the economy is in rude health. The long/medium term AAII Bulls chart below peaks just before stock market downturns...

The AAII Bulls rolling 12 month average (Year on Year change) chart below also peaks just stock market downturns and troughs before upturns (as highlighted below before the most recent turnaround near the start of 2023...

Low Investor Sentiment is Good Time To Enter The Markets

The AAII Bulls green line below has bottomed out just before significant long term uptrends. When this measure of bulls in the market who still think the market will head up is at a low, it tends to coincide with the point at which sellers have reached exhaustion and overdone their selling leaving bargains on the shelf to be snapped up for long term gains.

Consumer Confidence & Sentiment (Demand Indicator)

• GS SENTIMENT INDICATOR
  (As consumer confidence drives the expected direction of consumer spending needed by an economy, the final link (Conference page) will have somewhere on the page global and regional consumer confidence indicators. Once again we are only interested if these are in the red or trending down.)

• CONSUMER CONFIDENCE

The University of Michigan Consumer Sentiment Index tracks consumer sentiment in the US going way back to the 1950s. We are currently at ALL TIME LOW's! These lows have also marked the best times in history to invest at market lows...

The US Consumer sentiment chart above shows the grey shaded areas as recessions. The 2022 reading is lower than at the bottom of the 2008 Great Financial Crisis. Its the same picture for the UK...

Consumer Discretionary Spending vs Consumer Staples Spending

Consumer Discretionary Spending (as expressed via the Consumer Discretionary Spending ETF (XLY) ) is a good indicator of the relative strength of the sentiment of the US Consumer. When XLY is outpacing Consumer Staples Spending ETF (XLP) then it can be seen as bullish for the US stock market as spending by the US consumer will boost stocks. The US Consumer represents 33% of the entire US economy. If the graph is heading up it's could be bullish for the US stock market...

Global Fund Manager Sentiment

The B of A Global Fund Manager Survey gives us a pretty good indication of market sentiment for the Fund Managers whose job it is to get calls on the market right. The peaks and troughs of the various measures in the report/charts marry up nicely with peaks and troughs in the markets: -

FEAR & GREED - INVESTOR SENTIMENT

Extreme lows in the CNN Fear & Greed indicator shown below are decent contrarian points at which to commit money to the stock  market with rally seen following these points... 

DEMAND SIGNALS FOR RECESSION AHEAD

Another pre-cursor to recession is a big decline in the Transportation sector. Before each of the previous major recessions we talked about above we have seen this decline in transportation. Low and behold, it's back in 2024.

So yes indeed, we are ticking all of the boxes for the late stage topping process (stage 3 above) and pre-recessionary signals...

The other main demand based signal that triggers ahead of (or with) recession is the US Manufacturing PMI. This often 'leads' the Services PMI and the wider US economy. Each time its has headed south of 45 we have seen a recession. At time of writing it's hovering around 47. If this continues down and stays down then we could see our recession sooner rather than later, but if it springs back up from this level like it did in 1989 (as you can see below), then we could be another 6 months to a year ahead of the next recession...

The US Manufacturing PMI is a very important metric to track. As see below the bear market in 2022 was predicted by the divergence and decline of the PMU about 6 to 9 months before the downturn… i.e. The stock market will start doing badly about 6 to 9 month lag after the economy (PMI) starts doing badly...
(but the 2nd chart below shows long term HODL is still valid)

The 10 Year US Gov Bond yield is highly correlated with the US ISM Manufacturing PMI. highlighted in red and blue are the downturns…(black yield line below is ‘inverted’ to show the correlation…)

The really big downturns in the PMI in 2000 and 2008 went hand in hand with those big stock market crashes. The correlation also applies on the way back up… 

Purchasing Managers Indices - The Official Measure of Global Demand

Purchasing Managers Indices (PMI) are a measure of purchases made by businesses and is a leading measure of economic strength. A PMI above 50 signals expansion and when below 50 its signals contraction. The image below shows the European and US PMIs to the end of 2019. As you can see the Great Financial Crisis 2008 (GFC) would have been a good time to consider the tactical use of bond funds as ‘flights to safety’ to preserve capital. Or, even basic ‘shorting’ of the market by selling out into cash and waiting for the bottom that inevitably comes and turns up again. For example the US and Eurozone composite PMI’s below show strong levels of confidence returning halfway through 2009… a good time to get back into the markets.

PMI (Purchasing Manager) indexes show current economic demand. This turns down when the stock market is about to do the same. So, once again, we need to be concerned about the US with globally 'diversified' funds so heavily invested in them. US manufacturing leads the stock market. If it goes down then US equities tend to follow and global equity markets behind the US markets

• US Manufacturing PMI (Markit)

• US Manufacturing PMI (ISM)

• US Manufacturing PMI (Services)

Figures above 50 show firms reporting growth, while figures below 50 mark decline. The previous low of 38.1 was in November 2008. For good measure, I have added a link to the Oxford Economics homepage which offers a great summary for the outlook and includes forecasting: –

• PMI HOMEPAGE

• PMI COMMENTARY & ANALYSIS

• PMI PRESS RELEASES

• OXFORD ECONOMICS

For a measure of the increase/decrease on global manufacturing (which is a decent barometer of where our global funds are heading, MacroMicro have created the the World Manufacturing Cycle Index. (You might need to scroll through the "Indicators for Market Reversal for the Next 6 Months" section to see this chart.)

The “PMI Research & Analysis” link shows headlines ordered by date so you can get an instant summary of market strength or weakness just from reading the headlines. The brilliant tradingeconomics.com links also show PMI graphs/info and also have forecast tabs to show forecasts using economic models.

TRADING ECONOMICS US Composite PMI

TRADING ECONOMICS EURO PMI

CHINA PMI

The 'spread' between 'New Orders' and 'Inventories' show below from the ISM graph indicates that the US is already in a recession as the current level for that graph has only ever been seen when the US was in a recession.

Capacity Utilisation

Related to the PMI's above the Capacity Utilisation has a long track record in the US so we can trace this measure of demand going way back. We can see this demand measure drop off in the last 3 major financial crises along with a drop off in GDP...

• Capacity Utilization & GDP (Fed Reserve chart)

Gross Domestic Product - GDP (Demand)

Gross Domestic Product (GDP) measures the economic output of a country letting us know if the economy is expanding or contracting.  In addition to the GDP links below you will find a smattering of recession and sentiment indicators and forecasts giving us a deeper dive into where we might be heading in the near to medium term future.

The GDP Growth link below for the US and UK, shows quarterly GDP growth. Two quarters of negative growth would me we are in a recession.

• UNITED KINGDOM GDP GROWTH RATE

• US GDP

The ONS link/page below will show the GDP for the previous year, and more interestingly the latest monthly GDP so we can get the latest data from the UK Gov .

• ONS – UNITED KINGDOM GDP

As GDP is assessed on a quarterly basis this can entail a long wait before investors know what the latest GDP data is. The 'GDP Now'  site below gives an estimate on the likely current GDP...

• GDP Now

• Atlanta Fed GDPNOW vs the 'bluechip consensus' GDP forecast (these can be vastly different)

The IMF Data Mapper shows GDP and GDP forecasts graphically for the main regions and then you can select countries to view the same data at the country level.

IMF DATA HOME

IMF DATA MAPPER

The IMF Data Home page also has links to 3 popular publications reports (Economic Outlook, Financial Stability, Fiscal Monitor) if you're really keen!

Simple GDP YoY Percentage Change points to Global Recession

When there is a major financial crisis in the offing, the YoY GDP percentage turning negative is a huge warning sign. GFC 2008 and Covid Crash 2020 are clearly shown below...

Shipping, Transport, Trade & Copper

Copper acts as a barometer for global demand. It is used in so many products that when its price starts to trend down, it's likely caused by the lack o demand or goods.  

• COPPER PRICE CHART

Shipping and Transportation indices indicate the direction economies are heading. The Baltic Dry index measures the cost of global shipping. The Dow Jones Average is indicative of the US, but both the Dow Jones and Baltic Dry Index are also indicative of the global economy. Similar Indices are provided for the Eurozone and UK. Are they ranging sideways, up or down? look for ‘forecast’ links/tab, what is the forecast?

• BALTIC DRY INDEX

• DOW JONES TRANSPORTATION AVERAG (^DJT)

• EUROPEAN UNION CPI TRANSPORTATION

• MSCI EUROPE TRANSPORTATION INDEX

• UK TRANSPORTATION (SECTOR)

• UNITED KINGDOM CPI TRANSPORTATION

Then we have the big Transportation Index/ETF... Ticker:IYT  which is very sensitive to economic demand - a leading indicator of economic activity...