DEMAND & Consumer Sentiment & Investor Sentiment - Fundamental Analysis For Long-term Stock Market Investors

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.

Fundamental Analysis: The Main 'DEMAND' Charts AND INDICATORS

Demand determines supply which creates corporate earnings and profits. Therefore, in the first instance we are looking for signs of a secular drop off in demand for our first indicator of a secular downturn. Out focus here is on the more sensitive sectors, indexes, and indicators to demand.

Falling Demand (Imports) with Rising Unemployment

The 3 main pre-covid US (and global) market crashes were accompanied by the Imports line crossing below zero and the Unemployment line starting a steeper ascent from a low position on the "Change from a Year ago" measure...

Capacity Utilisation & Industrial Production & GDP

These 2 metrics should be monitored monthly on the 'Percentage change from a year ago' scale. Drops and holding pattern below zero is a warning sign the economy and stock market may go into decline, regardless of there being a recession or not.

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... (Note: Click the "Edit graph" button on the Fed page and switch the charts to 'Percentage change from a year ago' in order to see a clear relationship between sub-zero readings and recessions...)

Capacity Utilization & GDP (Fed Reserve chart)

Industrial Production... how much are factories producing... logically is a function of demand so if production is waning, it's a sign that demand is waning. they is key stock market metric to consider: -

Industrial Production (Fed Reserve chart)

For a deep dive on Global Demand <<< CLICK HERE >>>

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...

University of Michigan secular chart below shows green bars at significant lows in tge U of M report and stock market bottoms...

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...

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: -

Put to Call Ratio for Equites

One of the best measures of stock market investor sentiment is the Equity-only put-call ratio. This is represented below by the CPCE index. This is plotted on the long term chart below showing how the direction if the 253 day MA can be inversely correlated with the SP500 and especially with large, or long term declines translating to significant gains...

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...

Another thing to watch out for is divergences in the Fear & Greed index. The Daily chart below shows one such divergence where the F&G blue line starts to trend down whilst the stock market (SP500) continues to trend up. This is followed a sharp decline in the SP500...

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 the PMI has headed south of 45 we have seen a recession. At the 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 then we could be another 6 months to a year ahead of the next recession.

Read our PMI & Recessions Page for the lowdown on this vital Measure of Demand.

Capacity Utilisation

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.

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?

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

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