Economic Indicators

Does the level of, or change in, the annual U.S. federal surplus/deficit systematically influence the U.S. stock market, perhaps by affecting consumption and thereby corporate earnings or by modifying inflation and thereby discount rates? To check, we relate annual stock market returns to the annual surplus/deficit (receipts minus outlays) as a percentage of Gross Domestic Product (GDP). We align stock market returns with surplus/deficit calculations (federal fiscal years, FY) as follows: (1) prior to 1977, we calculate annual returns from July through June; (2) we ignore the July 1976 through September 1976 transition quarter; and, (3) since 1977, we calculate annual returns from October through September. Using surplus/deficit data and monthly returns for the S&P 500 Index (SP500) as a proxy for the U.S. stock market during FY 1930 through FY 2023 (about 94 years), we find that: Keep Reading

The Conference Board “publishes leading, coincident, and lagging indexes designed to signal peaks and troughs in the business cycle for major economies around the world,” including the widely cited Leading Economic Index (LEI) for the U.S. Does LEI predict stock market behavior? Using the as-released monthly change in LEI from archived Conference Board press releases and contemporaneous dividend-adjusted daily levels of SPDR S&P 500 (SPY) for June 2002 through November 2023 (257 monthly LEI observations), we find that: Keep Reading

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. Who is right? Using quarterly nominal level of the U.S. public debt, interest expense on the debt, U.S. Gross Domestic Product (GDP), S&P 500 Index level (SP500) and consumer price index (CPI) as available during January 1966 (limited by public debt data) through September 2023 (about 58 years), we find that: Keep Reading

Is public saving rate a leading indicator of the stock market? Arguably, an increase (decrease) in saving rate means a shift away from (toward) consumption, corporate earnings and associated stock value. The Bureau of Economic Analysis (BEA) releases seasonally adjusted Personal Saving Rate (PSR) monthly with a lag of about one month for initial release and two additional months for revisions. Using this series and monthly S&P 500 Index level during January 1959 through September 2023, we find that…
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A reader asked: “Is disposable income a leading indicator of the stock market?” Arguably, an increase in disposable income could spur consumption, corporate earnings and associated stock values. The Bureau of Economic Analysis (BEA) releases seasonally adjusted Disposable Personal Income (DPI) monthly with a lag of about one month for initial release and two additional months for revisions. Using this series and monthly S&P 500 Index level during January 1959 through September 2023, we find that…

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How do individual asset classes react to monthly inflation indications? To investigate, we relate future monthly returns for the following 10 asset class exchange-traded fund (ETF) proxies to monthly changes in the U.S. Consumer Price Index (CPI):

• Equities:
  • SPDR S&P 500 (SPY)
  • iShares Russell 2000 Index (IWM)
  • iShares MSCI EAFE Index (EFA)
  • iShares MSCI Emerging Markets Index (EEM)
• Bonds:
  • iShares Barclays 20+ Year Treasury Bond (TLT)
  • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
  • iShares JPMorgan Emerging Markets Bond Fund (EMB)
• Real assets:
  • Vanguard REIT ETF (VNQ)
  • SPDR Gold Shares (GLD)
  • Invesco DB Commodity Index Tracking (DBC)

Using monthly CPI data (all items) and monthly dividend-adjusted returns for the above 10 asset class proxy ETFs as available from July 2002 through September 2023, we find that: Keep Reading

The “Simple Asset Class ETF Value Strategy” (SACEVS) seeks diversification across a small set of asset class exchanged-traded funds (ETF), plus a monthly tactical edge from potential undervaluation of three risk premiums:

1. Term – monthly difference between the 10-year Constant Maturity U.S. Treasury note (T-note) yield and the 3-month Constant Maturity U.S. Treasury bill (T-bill) yield.
2. Credit – monthly difference between the Moody’s Seasoned Baa Corporate Bonds yield and the T-note yield.
3. Equity – monthly difference between S&P 500 operating earnings yield and the T-note yield.

Premium valuations are relative to historical averages. How might this strategy react to changes in the Effective Federal Funds Rate (EFFR)? Using end-of-month values of the three risk premiums, EFFR, total 12-month U.S. inflation and core 12-month U.S. inflation during March 1989 (limited by availability of operating earnings data) through September 2023, we find that: Keep Reading

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 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 third quarter 2023 report is August 11, 2023, with forecasts through the third quarter of 2024. The “Anxious Index” is the probability of recession during the next quarter. Are these forecasts meaningful for future U.S. stock market returns? Rather than relate the probability of recession to stock market returns, we instead relate one minus the probability of recession (the probability of good times). If forecasts are accurate, a relatively high (low) forecasted probability of good times should indicate a relatively strong (weak) stock market. Using survey results and quarterly S&P 500 Index levels (on survey release dates as available, and mid-quarter before availability of release dates) from the fourth quarter of 1968 through the third quarter of 2023 (220 surveys), we find that:

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Does quantified uncertainty in government economic policy reliably predict stock market returns? To investigate, we consider the U.S. Economic Policy Uncertainty (EPU) Index, created by Scott Baker, Nicholas Bloom and Steven Davis and constructed from three components:

1. Coverage of policy-related economic uncertainty by prominent newspapers.
2. Number of temporary federal tax code provisions set to expire in future years.
3. Level of disagreement in one-year forecasts among participants in the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters for both (a) the consumer price index (CPI) and (b) purchasing of goods and services by federal, state and local governments.

They normalize each component by its own standard deviation prior to 2012 and then compute a weighted average of components, assigning a weight of one half to news coverage and one sixth each to tax code uncertainty, CPI forecast disagreement and government purchasing forecast disagreement. They update the index monthly at the beginning of the following month, potentially revising recent months. Using monthly levels of the EPU Index and the S&P 500 Index during January 1985 through August 2023, we find that: Keep Reading

Each month, the Institute for Supply Management (ISM) each month generates the Services Purchasing Managers Index (PMI), aggregating monthly inputs from purchasing and supply executives in services firms across the U.S. regarding business activity, new orders, employment and supplier deliveries. ISM releases Services PMI for a month on the third business day of the following month. Does the monthly level of Services PMI or the monthly change in Services PMI predict U.S. stock market returns? Using monthly seasonally adjusted Services PMI data during January 2008 through January 2016 from the Federal Reserve Bank of St. Louis and from press releases thereafter through August 2023, and contemporaneous monthly S&P 500 Index closes, we find that: Keep Reading