Economic Indicators
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.
Commercial and Industrial Credit as a Stock Market Driver January 31, 2012
Does commercial and industrial (C&I) credit drive the stock market? To investigate, we relate changes in credit standards from the Federal Reserve Board’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices to future U.S. stock market returns. The Federal Reserve publishes survey results about the end of the first month of each quarter. Using the ”Net Percentage of Domestic Respondents Tightening Standards for C&I Loans” from the Senior Loan Officer Opinion Survey on Bank Lending Practices Chart Data for the second quarter of 1990 through the fourth quarter of 2011 (87 surveys), and contemporaneous S&P 500 Index quarterly returns, we find that: More…
Inflation Forecast Update January 19, 2012
The Inflation Forecast now incorporates actual total and core Consumer Price Index data for December 2011. The actual total (core) inflation rate for December is about the same as (slightly higher than) forecasted. The inflation seasonality summary (second chart) now incorporates data for 2011.
The new actual and forecasted inflation rates will flow into Real Earnings Yield Model projections about the end of January.
Real Bond Returns and Inflation January 11, 2012
A subscriber asked: “Everyone says I should not invest in bonds today because the interest rate is so low (and inflation is daunting). But real bond returns over the last 30 years are great, even while interest rates are low. Could you analyze why bonds do well after, but not before, 1981?” Total bond returns consist of a yield component and a change in market price component. Conveniently, Damodaran Online offers estimated annual total returns for 10-year U.S. Treasury notes (T-note) since 1928. Using annual total returns for T-notes and the lagged 12-month U.S. inflation rate during 1928 through 2010, we find that: More…
Stock Market Reaction to FOMC Meeting Minutes Releases December 28, 2011
Does the U.S. stock market reliably exhibit extreme behavior on days when the Federal Open Market Committee (FOMC) of the Federal Reserve Board issues its meeting minutes? Are the minutes systematically encouraging, discouraging, calming or exciting? Using release dates for these minutes and contemporaneous daily open, high, low and close levels of S&P Depository Receipts (SPY) during February 2005 through November 2011 (55 release dates), plus a sample of SPY one-minute prices for 9:30-16:15 spanning 2005-2008 (31 release dates), we find that: More…
Economic Announcements and VIX December 16, 2011
Do economic announcements systematically remove uncertainty from financial markets and thus reliably lower implied volatility indexes? In their September 2010 paper entitled “The Impact of Macroeconomic Announcements on Implied Volatilities”, Roland Füss, Ferdinand Mager and Lu Zhao measure the reactions of the Chicago Board Options Exchange Volatility Index (VIX) and the DAX Volatility Index (VDAX) to U.S. and German macroeconomic announcements. They consider announcements of Gross Domestic Product (GDP), the Producer Price Index (PPI) and the Consumer Price Index (CPI). The measurement interval is apparently close-to-close from the day before to the day of announcement. Using monthly/quarterly macroeconomic announcement dates from January 2005 through December 2009 and contemporaneous daily data for VIX and VDAX (60 months), they find that: More…
Do Any Style ETFs Reliably Lead or Lag the Market? December 15, 2011
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 November 2011 (124 months, limited by data for IWS/IWP), we find that: More…
Do Any Sector ETFs Reliably Lead or Lag the Market? December 13, 2011
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 November 2011 (156 months), we find that: More…
Money Velocity and the Stock Market December 6, 2011
Regarding “Money Supply (M2) and the Stock Market”, a subscriber responded:
“I’ve always thought…that both M2 and velocity were needed. If there’s more money, but it is not circulating, then it doesn’t have a chance to have much impact. That’s the situation we have right now for the most part?”
The Federal Reserve Bank of St. Louis tracks money velocity based on both M1 and M2 money supplies at a quarterly frequency, stating that: “Velocity is a ratio of nominal GDP to a measure of the money supply. It can be thought of as the rate of turnover in the money supply–that is, the number of times one dollar is used to purchase final goods and services included in GDP.” Specifically, the bank calculates money velocity as quarterly nominal GDP divided by average money supply during the quarter. Using quarterly values for seasonally adjusted Velocity of M1 Money Stock, Velocity of M2 Money Stock and the S&P 500 Index from the last quarter of 1958 through the second quarter of 2011 (211 quarters), we find that: More…
Money Supply (M1) and the Stock Market December 1, 2011
A reader wrote:
“I couldn’t find an analysis for the M1 money supply similar to the one for M2. How about it? M2 cannot be an accurate money supply measure because it includes non-cash investments such as money market mutual funds. When the stock market corrects and people are exchanging stocks for say, money market mutual fund shares, the M2 figure will actually increase. The money supply is not literally increasing in such cases as no new cash is being created; there is merely an exchange of existing assets. Technically, only increasing the monetary base would increase the money supply, but M1 is a reasonable substitute for that as it includes the cash part of bank reserves.”
The M1 money stock consists of funds that are readily accessible for spending: currency in circulation, traveler’s checks, demand deposits and other checkable deposits. Is there a reliable relationship between historical variation in M1 and stock market returns? Using weekly data for seasonally adjusted M1 and the S&P 500 Index during January 1975 through October 2011 (1,923 weeks), we find that: More…
Money Supply (M2) and the Stock Market November 29, 2011
Some investing experts cite change in money supply as a potentially important indicator of future stock market behavior. When the money supply grows (shrinks), they theorize, nominal asset prices go up (down). Or, money supply growth drives inflation, thereby elevating discount rates and depressing equity valuations. One measure of money supply is the M2 money stock, which consists of currency, checking accounts, saving accounts, small certificates of deposit and retail money market mutual funds. Is there a reliable relationship between historical variation in M2 and stock market returns? Using weekly data for seasonally adjusted M2 and the S&P 500 Index during November 1980 through October 2011 (1,619 weeks), we find that: More…
