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.

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Inflation Forecast Update

The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for March 2016. The actual total (core) inflation rate for March is a little lower than (a little lower than) forecasted.

ISM NMI and Stock Returns

Each month, the Institute for Supply Management (ISM) compiles results of a survey “sent to more than 375 purchasing executives working in the non-manufacturing industries across the country.” Based on this survey, ISM computes the Non-Manufacturing Index (NMI), “a composite index based on the diffusion indexes for four…indicators with equal weights: Business Activity (seasonally adjusted), New Orders (seasonally adjusted), Employment (seasonally adjusted) and Supplier Deliveries.” ISM releases NMI for a month on the third business day of the following month. Does the monthly level of NMI or the monthly change in NMI predict U.S. stock market returns? Using monthly NMI data and monthly closes of the S&P 500 Index from January 2008 through January 2016 (97 months), we find that: Keep Reading

ISM PMI and Stock Returns

According to the Institute for Supply Management (ISM) ISM, their Manufacturing Report On Business, published since 1931, “is considered by many economists to be the most reliable near-term economic barometer available.” The manufacturing summary component of this report is the Purchasing Managers’ Index (PMI), aggregating monthly inputs from purchasing and supply executives across the U.S. regarding new orders, production, employment, deliveries and inventories. ISM releases PMI for a month at the beginning of the following month. Does PMI, as claimed by some financial experts, predict stock market returns? Using monthly seasonally adjusted PMI data and monthly S&P 500 Index closes from January 1950 through January 2016 (793 months), we find that: Keep Reading

Should the “Anxious Index” Make Investors Anxious?

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 economic experts the probabilities of U.S. economic recession (negative GDP growth) during each of the next four quarters. The survey report release schedule is mid-quarter. For example, the release date of the survey report for the first quarter of 2016 is February 12, 2016, with forecasts for the second quarter of 2016 through the first quarter of 2017. The “Anxious Index” is the probability of recession during the next quarter. When professional forecasters are relatively optimistic (pessimistic) about the economy, does the stock market go up (down) over the coming quarters? Using survey results and quarterly S&P 500 Index levels (measured in the middle of calendar quarters to approximate release dates of survey results) from the fourth quarter of 1968 through the first quarter of 2016 (190 surveys), we find that: Keep Reading

ECRI’s Weekly Leading Index and the Stock Market

Financial market commentators and media sometimes cite the Economic Cycle Research Institute’s (ECRI) U.S. Weekly Leading Index (WLI) as an important economic indicator, implying that it is predictive of future stock market performance. According to ECRI, WLI “has a moderate lead over cyclical turns in U.S. economic activity.” ECRI publicly releases a preliminary (revised) WLI value with a one-week (two-week) lag. Does this indicator usefully predict U.S. stock market returns? Using WLI values for January 1967 through January 2016 and contemporaneous weekly levels of the S&P 500 Index, we find that: Keep Reading

Economic News Leaks to Some Traders?

Can small (unconnected) investors compete in trades on economic news? In the February 2016 draft of her paper entitled “Is Someone Front-Running You Around News Releases?”, Irene Aldridge examines U.S. stock price, volatility and trading activity around ISM Manufacturing Index and Construction Spending news releases (which occur while the stock market is open). Media violations of embargoes on pre-release distribution of such news, intended to promote widespread simultaneous scheduled release, could influence this activity. She uses average price response of Russell 3000 stocks as a market reaction metric. She considers news “direction” relative either to prior-month value (increase or decrease) or to consensus forecast (above or below). Using one-minute trading data for Russell 3000 Index stocks around monthly ISM Manufacturing Index and Construction Spending announcements during January 2013 through October 2015, she finds that: Keep Reading

GDP Growth and Stock Market Returns

Many stock market commentators cite Gross Domestic Product (GDP) growth from the Bureau of Economic Analysis (BEA) as an indicator of stock market prospects, and the financial media dutifully report advance, preliminary and final U.S. GDP growth rates each month on a quarterly cycle. Does growth in GDP or any of its Personal Consumption Expenditures (PCE), Private Domestic Investment (PDI) and government spending components usefully predict stock market returns? Using quarterly and annual seasonally adjusted nominal GDP data from BEA National Income and Product Accounts Table 1.1.5 as available during January 1929 through December 2015 (about 87 years) and contemporaneous levels of the S&P 500 Index (since 1950 only) and the Dow Jones Industrial Average (DJIA), we find that: Keep Reading

Do Copper Prices Lead the Broad Equity Market?

A reader asked: “Do copper futures prices reliably lead the market, as some believe.” The hypothesis is that demand for copper is a reliable leading indicator of economic activity and therefore of future corporate earnings and equity prices. In lieu of a long-run set of copper futures data, we use the monthly price index for copper base scrap (not seasonally adjusted) from the U.S. Bureau of Labor Statistics, which spans multiple economic expansions and contractions. Using monthly levels of the copper scrap price index and the S&P 500 Index for January 1957 through December 2015 (59 years), we find that: Keep Reading

Unemployment Rate and Stock Market Returns

The financial media and expert commentators sometimes cite the U.S. unemployment rate as an indicator of economic and stock market health, generally interpreting a jump (drop) in the unemployment rate as bad (good) for stocks. Conversely, investors may interpret a falling unemployment rate as a trigger for increases in the Federal Reserve target interest rate (and adverse stock market reactions). Is this indicator in fact predictive of U.S. stock market behavior in subsequent months, quarters and years? Using the monthly unemployment rate from the U.S. Bureau of Labor Statistics (BLS) and contemporaneous S&P 500 Index data for the period January 1950 through December 2015 (792 months), we find that: Keep Reading

Employment and Stocks Over the Intermediate Term

U.S. job gains or losses are a prominent element of the monthly investment-related news cycle, with the financial media and expert commentators generally interpreting changes in employment as an indicator of future economic and stock market health. One line of reasoning is that jobs generate personal income, which spurs personal consumption, which boosts corporate earnings and lifts the stock market. Are employment trends in fact predictive of U.S. stock market behavior in subsequent months, quarters and years? Using monthly seasonally adjusted nonfarm employment data from the U.S. Bureau of Labor Statistics (BLS) and contemporaneous S&P 500 Index data for the period January 1950 through December 2015 (792 months), we find that: Keep Reading

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