Should the “Anxious Index” Make Investors Anxious?
Posted in Economic Indicators, Investing Expertise
September 14, 2009
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 recession in each of the next four quarters. The “Anxious Index” is the probability of recession in 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 raw survey results and quarterly S&P 500 Index data from the third quarter of 1968 through the second quarter of 2009 (164 surveys), we find that:
The following scatter plot relates the forecasted probability of recession for the next quarter to the change in the S&P 500 index over that same quarter since survey inception. No relationship is visually obvious. The Pearson correlation for the relationship is -0.04 and the R-squared statistic is 0.00, indicating that variations in forecasted probability of recession explain none of the variations in stock market returns.
For the first half of the sample (mid-1968 through 1988), the correlation is 0.00. For the second half of the sample (since 1989), the correlation is -0.10 with R-squared 0.01).
Might extreme values of the forecasted probability of recession be meaningful for stocks?
The next chart summarizes the average quarterly return for the S&P 500 Index by quintile of the forecasted probability of recession for the same quarter over the entire sample period. These results suggest that higher forecasted probabilities of recession may indicate a weaker stock market. However, the relationship is not systematic across quintiles and the quintile subsamples are not large, so the results are not reliable.
Are there any useful relationships between forecasted probabilities of recession and stock returns over different intervals?
The final chart summarizes relationships between forecasted probabilities of recession and S&P 500 index returns over the entire sample period for different forecast horizons. Specifically, it plots the correlations for different combinations of:
- Recession probability forecast intervals of 3, 6, 9 and 12 months into the future.
- Intervals of S&P 500 index behavior for 3, 6, 9 and 12 months back into the past and 3, 6, 9 and 12 months forward into the future).
In general, there are notable negative correlations between forecasted probabilities of recession for the next 3, 6 and 9 months and past S&P 500 index returns. If the stock market has been rising (falling), forecasts of the probability of recession during the next three quarters tend to be lower (higher). In other words, forecasters seem to regard the past behavior of stocks as predictive for the economy over the next few quarters.
There are no notable correlations between forecasted probabilities of recession and future S&P 500 index returns. The predicted probabilities of recession for quarters during the coming year have little or nothing to do with stock returns over that year.
In summary, while there is a possibility that high values of the “Anxious Index” from the Survey of Professional Forecasters indicate stock market weakness the next quarter, this indicator does not convincingly relate to future U.S. stock market behavior.
