- Consumer sentiment and jobs data are two leading indicators that can help investors make smart investment choices.
- Consumer sentiment spiked in May 2020, powered by the reopening of the states. Job openings data are not as cheerful though.
- Both data sets come with many caveats, and investors must tread with caution.
Wherever we are seeing something getting used, that to us is an early indicator that there might be something that people want. And then let's figure out how to make that great. And then let's go figure out monetization. - Satya Nadella
All savvy investors analyze leading economic indicators to figure out trending business sectors and use the information to manage their holdings smartly. Consumer sentiment and job data are two key indicators that can help us decode the direction of the economy.
That said, we are living in extraordinary and volatile times, in which the ground situation is continuously evolving. Therefore, we must reconcile data from leading indicators with the current situation, before passing judgment.
For example, on May 30, 2020, the SPY had gained 24% since the March 23rd low, despite consumer sentiment hovering around its lowest levels. Nonetheless, the SPY kept on rising till June 10, 2020, where it finally met resistance.
Sentiment Gap
Why did the market continue rising despite the bearish signal generated by the Consumer Sentiment Index? – Because the market was flush with liquidity, interest rates were near zero, gold was at an all-time high, and risky assets were the only option left for investors.
Why did the market react violently and negatively on June 10, 2020? – Because COVID-19 cases started spiking once again, and economic indicators remain subdued, despite many states reopening.
The point is that data from leading indicators have to be merged with the current situation, before judging the trend. With that said, here’s what the following two leading indicators are suggesting for the current situation:
- CONSUMER SENTIMENT
Consumer Sentiment
Consumer sentiment spiked to 78.9 in May 2020, up from 72.3 in April 2020, beating analysts’ estimates of 75. The rise in sentiment was powered by the reopening of the states. However, the improvement does not imply we are out of the woods. The survey conducted by the University of Michigan found that two-thirds of all consumers expected bad times ahead in 2020 because they foresaw another wave of COVID-19, and a delayed economic recovery because of the impact of the high unemployment rate.
The survey found uncertainty had gripped consumers and they were likely to postpone discretionary purchases. However, the survey also found that companies had started offering deep discounts, and that helped ease a part of consumers’ concerns.
- JOBS DATA
The latest JOLTS report contains data as of April 30, 2020. According to the release, job openings declined from 6 million in March 2020 to 5 million in April 2020. Hires declined from 5.1 million to 3.5 million in the same period.
Jobs Data
The biggest contributors to the decline were leisure and hospitality, professional and business services, healthcare and social assistance, trade, transportation and utilities, and retail trade.
Hires too, decreased in many business sectors. Professional and business services, accommodation and food services, and construction led the declines all across the U.S.
I would avoid investing in such industries – there’s no need to play with fire.
SUMMING UP
Let’s reconcile the data with the on-ground situation: Chapter 11 bankruptcy filings increased by 48% in May 2020, COVID-19 has started rearing its ugly head again, and there is some ambiguity about the unemployment report that sparked a massive rally.
The signals that we are getting suggest that uncertainty will prevail until an effective vaccine is discovered. The virus has taken a very heavy toll on the economy, and it seems it will carry on causing damage.
From the data above, and a medium-term point of view, I would avoid investing in the following businesses:
- Restaurants and Hotels (including food service companies)
- Consumer discretionary goods
- Professional and business services
- Transportation, utilities, and trade services
However, I would still chase beaten-down retailers that have been doing business for decades. It’s not going to be so easy to beat these guys.