Personal Savings Rate and the Stock Market

In an 11/6/09 entry in his blog, guru Marc Faber observes: “There seems to be an inverse relationship between the savings rate and the stock market performance. When the savings rate is declining it is favorable for equities whereas when savings rate is increasing such as was the case in the late 1960`s, early 1980`s, and now, stock prices tend to move sideward or down.” Is this belief correct? If so, can investors exploit it? To check, we relate the U.S. personal saving rate as calculated quarterly by the Bureau of Economic Analysis (as a percentage of disposable personal income) to the quarterly change in the S&P 500 index. Using data from the first quarter of 1952 through the third quarter of 2009 (231 quarters), we find that:

The following chart compares the behaviors of the S&P 500 Index and the personal saving rate based on quarterly data over the entire sample period. The personal saving rate, while volatile, generally rises from the 1950s through the 1970s and declines from the 1980s through the 2000s. No consistent relationship between the stock market and the personal saving rate is obvious.

For precision, we relate stock market return to the personal saving rate.

The following scatter plot relates the quarterly return for the S&P 500 Index to the same-quarter personal saving rate over the entire sample period. The Pearson correlation for the two series is 0.04 and the R-squared statistic is 0.00, indicating no meaningful relationship between stock market return and the personal saving rate.

In case there is a lag between the personal saving rate and stocks, we relate the quarterly return for the S&P 500 Index to the prior-quarter personal saving rate. The Pearson correlation is still 0.04, and the R-squared statistic is still 0.00.

As a literal test of Marc Faber’s observation, we relate the quarterly return for the S&P 500 Index to the quarterly change in the personal saving rate. The Pearson correlation for this relationship is -0.01, and the R-squared statistic is again 0.00.

To check for a possible non-linear relationship, we segment stock market performance by ranges of the personal saving rate.

The next chart shows the average quarterly return for the S&P 500 Index by quintile of same-quarter personal saving rate over the entire sample period. While the lowest quintile of personal saving rates produces the lowest average stock market return, the highest quintile does not produce the highest return, and the results across quintiles are not systematic.

As a final test, we look at other lead-lag relationships for stock market performance and the personal saving rate.

The final chart shows the correlations for various lead-lag relationships between the quarterly return for the S&P 500 Index and the quarterly personal saving rate over the entire sample period, ranging from stocks lead the personal saving rate by four quarters (-4) to the personal saving rate leads stocks by four quarters (4). While there might be a slight tendency for an increase in the personal saving rate to boost stocks over the next few quarters, all correlations are small. The strongest relationship tested is personal saving rate leads stocks by four quarters, with Pearson correlation 0.08 and R-squared statistic 0.01.

In summary, evidence from several simple tests does not support a belief in any relationship between U.S. stock market returns and the U.S. personal saving rate that is meaningful for investors.

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