Fear and greed is what drives volatility in the markets. What I wanted to understand was whether there were key indicators that can measure consumer sentiment that impact the SP500. There are still a lot of indicators I want to test but here are the 4 indicators I found effective in measuring consumer sentiment
Summary of Measures:
- Consumer Sentiment on Large Household Good Purchases
- Total Vehicle Sales in US
- Total Durable Good Sales in US
- US Unemployment
Consumer Sentiment on Large Household Good Purchases
When more than 50% of survey respondent answers that it’s currently a bad time to make large household good purchases, it mostly correlates to a correction or downturn in the market.
The most clear indication was the 08 subprime mortgage bust when tis metric spiked up to 55. The beginning of Covid was another time where sentiment spiked and even now is above 50. With this signal, it’s forecasting a continual downturn until the sentiment normalizes down to the 20s and 30s.
Total Vehicle Sales in US
I find this to be a great leading indicator. There are false signals however during 1993 and surprisingly no drop during the dotcom bust. But for every other major recession, it always comes with a steep drop in total vehicle sales.
Here is another indication that we’re currently in a depressed period. The question however is whether the decline in vehicle sales is due to supply constraints more than demand. However, vehicle sales did spike up during 2021 but came back down in 2022.
Total Durable Good Sales in US
For the most part, this follows the same trend as the 2 charts before this. This makes sense since the hypothesis is the same; if times are bad, it’s probably a bad time to make a big purchase.
Recessions are usually correlated with periods with high unemployment. There has been major spikes with every major correction for the most part, but the “spikes” varies from period to period. For example, during the start of Covid on March 2020, unemployment spiked to 14%.
Compare that with the dotcom bust, unemployment was only at 6%. This was still an egregious spikes for it’s period, but it’s not a black and white rule that unemployment over 6 percent equals a recession.