The U.S. economy is a very complex system, with indicators therefore ambiguous and difficult to interpret. To what degree do macroeconomics and the stock market go hand-in-hand, if at all? Do investors/traders: (1) react to economic readings; (2) anticipate them; or, (3) just muddle along, mostly fooled by randomness? These blog entries address relationships between economic indicators and the stock market.
Inflation Forecast Update May 16, 2013
The new actual and forecasted inflation rates will flow into Real Earnings Yield Model projections about the end of May.
Since 1990, the Federal Reserve Bank of Philadelphia has conducted a quarterly Survey of Professional Forecasters. The American Statistical Association and the National Bureau of Economic Research conducted the survey from 1968-1989. Among other things, the survey solicits from experts on the economy the probabilities of U.S. economic recession during each of the next four quarters. The “Anxious Index” is the probability of recession during the next quarter. When professional forecasters are relatively pessimistic (optimistic) about the economy, does the stock market go down (up) over the coming quarters? Using survey results and quarterly S&P 500 Index data from the fourth quarter of 1968 through the first quarter of 2013 (179 surveys), we find that: More…
Stock Returns on Days of Unemployment Claims Reports April 25, 2013
Each week the financial media report U.S. initial and continued unemployment claims (seasonally adjusted) as a potential indicator of future U.S. stock market returns. Does this economic indicator move the market on release days? To investigate, we focus on weekly changes in unemployment claims during a period of “modern” information dissemination to release-day stock market returns. A modern period arguably encompasses the entire history of S&P Depository Receipts (SPY), a proxy for the U.S. stock market. Using relevant news releases and archival data as available from the Department of Labor (DOL) and daily unadjusted opening and closing levels for SPY during late January 1993 through early April 2013 (1055 weeks), we find that: More…
Public Debt, Inflation and the Stock Market April 23, 2013
When the U.S. government runs substantial deficits, some experts proclaim the dollar’s inevitable inflationary debasement and bad times for stocks. Other experts say that deficits are no cause for alarm, because government spending stimulates the economy, and the country can bear more debt. Politicians argue about reducing spending and/or increasing taxes to reduce the deficit. Does a large federal deficit (increase in public debt) spur inflation and drive down stock prices? Using annual (end of fiscal year) level of the U.S. public debt, interest expense on the debt, U.S. Gross Domestic Product (GDP), Dow Jones Industrial Average (DJIA) return and inflation rate data over the period June 1929 through September 2012 (about 83 years), we find that: More…
PPI and the Stock Market April 4, 2013
Inflation at the producer level (derived from the Producer Price Index – PPI) is logically an advance indicator for inflation downstream at the consumer level (derived from the Consumer Price Index – CPI). Do investors therefore reliably react to changes in PPI as an indicator of the future wealth discount rate? In other words, is a high (low) producer-level inflation rate bad (good) for the stock market? Using monthly historical PPI data (for finished goods, not seasonally adjusted) from the Bureau of Labor Statistics (BLS) and contemporaneous S&P 500 Index data as available from January 1950 through February 2013 (758 months), we find that: More…
Dollar-Euro Exchange Rate, U.S. Stocks and Gold March 6, 2013
Do changes in the dollar-euro exchange rate reliably interact with the U.S. stock market and gold? For example, do declines in the dollar relative to the euro indicate increases in the dollar value of hard assets? Are the interactions coincident or exploitably predictive? To investigate, we relate changes in the dollar-euro exchange rate to returns for U.S. stock indexes and spot gold. Using monthly and weekly values of the dollar-euro exchange rate, levels of the S&P 500 Index and Russell 2000 Index and spot prices for gold during January 1999 (limited by the exchange rate series) through February 2013, we find that: More…
Do Any Style ETFs Reliably Lead or Lag the Market? February 21, 2013
Do any of the various U.S. stock market size and value/growth styles systematically lead or lag the overall market, perhaps because of some underlying business/economic cycle? To investigate, we consider the the following six exchange-traded funds (ETF) that cut across capitalization (large, medium and small) and value versus growth:
iShares Russell 1000 Value Index (IWD) – large capitalization value stocks.
iShares Russell 1000 Growth Index (IWF) – large capitalization growth stocks.
iShares Russell Midcap Value Index (IWS) – mid-capitalization value stocks.
iShares Russell Midcap Growth Index (IWP) – mid-capitalization growth stocks.
iShares Russell 2000 Value Index (IWN) – small capitalization value stocks.
iShares Russell 2000 Growth Index (IWO) – small capitalization growth stocks.
Using monthly dividend-adjusted closing prices for the style ETFs and S&P Depository Receipts (SPY) over the period August 2001 through January 2013 (139 months, limited by data for IWS/IWP), we find that: More…
Do Any Sector ETFs Reliably Lead or Lag the Market? February 14, 2013
Do any of the major U.S. stock market sectors systematically lead or lag the overall market, perhaps because of some underlying business/economic cycle? To investigate, we examine the behaviors of the nine sectors defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR), all of which have trading data back to December 1998:
Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)
Using monthly adjusted closing prices for these exchange traded funds (ETF) and for the S&P 500 index mimicking SPY (to represent the overall U.S. stock market) over the period December 1998 through January 2013 (171 months), we find that: More…
Gold Price Drivers? January 30, 2013
What drives the price of gold: inflation, stock prices, public sentiment? To investigate, we relate spot gold price to the Consumer Price Index (non-seasonally adjusted), the S&P 500 Index and consumer sentiment. We start sampling in 1975 because: “On March 17, 1968, …the price of gold on the private market was allowed to fluctuate…[, and] in 1975…the price of gold was left to find its free-market level.” Using monthly data from January 1975 (January 1978 for consumer sentiment) through December 2012 (456 months), we find that: More…
The Decision Moose Asset Allocation Framework October 4, 2012
A reader suggested a review of the Decision Moose asset allocation framework of William Dirlam. “Decision Moose is an automated framework for making intermediate-term investment decisions.” Decision Moose focuses on asset class momentum, as augmented by monetary policy, exchange rate and interest rate indicators. Its signals tell followers when to switch from one index fund to another among nine encompassing a broad range of asset classes, including equity indexes for several regions of the globe. The trading system is a long-only approach that allocates 100% of funds to the index “having the highest probability of price appreciation.” The site includes a history of switch recommendations since the end of August 1996, with gross performance. To evaluate Decision Moose, we assume that the 69 switches and associated trading returns are as described (out of sample, not backtested) and compare the returns to those for the dividend-adjusted S&P 500 Depository Receipts (SPY) over the same intervals. Using data for the 72 trades spanning 8/30/96 through 9/21/12 (16 years), we find that: More…