Stock Markets Follow Consumer Spending
- Stock markets are ultimately tied to corporate profits and thus consumer spending.
- When consumer spending declines, profits and markets follow.
- Interest rates also affect markets through impacts on spending.
- Understanding consumer spending helps predict market booms and busts.
- Falling spending means falling markets.
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The book Ahead of the Curve by Joseph Ellis discusses improving economic forecasting by using the right indicators and tracking year-over-year data instead of short-term fluctuations. It argues that recession definitions are overrated, and that slowing growth is more damaging than commonly realized. The book advocates focusing on consumer spending as the main economic driver, and provides guidance on relating indicators like incomes, interest rates and stock markets to spending. It aims to help readers make better forecasts for economies, industries and companies.
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Similar ideas to Stock Markets Follow Consumer Spending
Consumer Spending Is The Main Driver Of The Economy
Consumer spending dominates the economy. Because it is such a large share of GDP, it drives corporate profits — and corporate profits, as we saw, drive employment. The stock market is a predictive indicator, moving up and down with consumer spending.
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The Fed rate is also tied to inflation, which impacts earnings, which affects consumer spending. Inflation also moves hourly wages and direct interest rates. This can create the impression that interest rates and consumer spending are more closely related than they are.
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