Economic Indicators

A reader asked: “Lots of strategists and analysts look at Institute for Supply Management (ISM) data for guidance when it comes to the stock market. Does the ISM data predict stock returns?” According to 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 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 the PMI for a month at the beginning of the following month. Presumably, a strong/increasing PMI corresponds to strong stock returns. Using monthly data for PMI and the monthly closes of the S&P 500 Index from January 1950 through October 2010 (729 months), we find that: More…

Many equity market commentators cite Gross Domestic Product (GDP) growth 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 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 (final) GDP data as available from the Bureau of Economic Analysis (BEA) during January 1929 through September 2010 (81.5 years) and contemporaneous levels of the S&P 500 Index (since 1950) and the Dow Jones Industrial Average (DJIA), we find that: More…

The Conference Board “publishes leading, coincident, and lagging indexes designed to signal peaks and troughs in the business cycle for ten countries around the world,” including the widely cited Leading Economic Index (LEI) for the U.S. Does the LEI predict stock market behavior? Using the as-released monthly change in LEI from archived Conference Board press releases and contemporaneous price data for S&P Depository Receipts (SPY) for June 2002 through October 2010 (100 monthly observations), we find that: More…

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, seasonally adjusted) from the Bureau of Labor Statistics (BLS) and contemporaneous S&P 500 Index data as available from January 1950 through October 2010 (730 months), we find that: More…

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 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) figures for the level of the U.S. public debt from the Bureau of the Public Debt and contemporaneous Dow Jones Industrial Average (DJIA) and inflation rate data over the period June 1929 through September 2010 (about 81 years), we find that: More…

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 returns? Using monthly NMI data and monthly closes of the S&P 500 Index from January 2008 through September 2010 (33 months), we find that: More…

Each week the financial media faithfully report U.S. initial 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 relate 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 weekly seasonally adjusted initial unemployment claims and daily unadjusted open and close levels for SPY over the period February 1993 through October 2010 (926 weeks), we find that: More…

Each month the financial media report U.S. new home sales (seasonally adjusted and annualized) as a potential indicator of future stock market returns. Does this economic indicator convey useful information about future equity returns? To investigate, we relate new home sales to S&P 500 Index behavior over monthly, quarterly and annual intervals. Using monthly data for the S&P 500 Index and for seasonally adjusted annualized new homes sales over the period January 1963 through September 2010 (573 months or nearly 48 years), we find that: More…

Do investors reliably react over short and intermediate terms to changes in the Consumer Price Index (CPI) as a measure of the wealth discount rate? Using monthly CPI releases (for all items, not seasonally adjusted) from the Bureau of Labor Statistics (BLS) and contemporaneous S&P 500 Index open and close data for the period January 1994 (the earliest for which release dates are available) through October 2010 (202 releases), we find that: More…

A reader proposed the following variations of conventional yield curve (U.S. Treasuries term spread) wisdom:

1. The negative impact of yield curve inversion on the stock market begins a few quarters later. Try lagging the yield curve steepness signal by six months.
2. Yield curve steepening due to a falling risk-free rate is bearish for the stock market, whereas steepening while the risk-free rate is rising (or at least not at the current extreme low level) is bullish.

Do the data support these hypotheses? Using average monthly yields for 90-day Treasuries (T-bill) and 10-year Treasuries (T-note) and contemporaneous monthly levels of the S&P 500 Index for April 1953 through August 2010 (689 months) and of S&P Depository Receipts (SPY) for January 1993 through August 2010, we find that: More…