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.
Do U.S. business applications, based on Employer Identification Number (EIN) applications associated with new businesses, predict future economic activity and therefore stock market returns? To investigate, we relate changes in both seasonally adjusted (SA) and non-seasonally adjusted (NSA) business applications to S&P 500 Index (SP500) returns at monthly and annual frequencies. In case the relationships are non-linear, we also look at average SP500 returns for negative/positive and extreme changes in business applications. Monthly business application data are released 11-12 days after the end of the observed month. Using monthly SA and NSA business application counts and contemporaneous SP500 levels during July 2004 (limited by the business applications series) through June 2026, we find that:Keep Reading
How do different asset classes interact with the Japanese yen-U.S. dollar exchange rate? To investigate, we consider relationships between Invesco CurrencyShares Japanese Yen (FXY) and the exchange-traded fund (ETF) asset class proxies used in the Simple Asset Class ETF Momentum Strategy (SACEMS) or the Simple Asset Class ETF Value Strategy (SACEVS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for FXY and the asset class proxies since March 2007 as available through June 2026, we find that:Keep Reading
How do different asset classes interact with euro-U.S. dollar exchange rate? To investigate, we consider relationships between Invesco CurrencyShares Euro Currency (FXE) and the exchange-traded fund (ETF) asset class proxies used in the Simple Asset Class ETF Momentum Strategy (SACEMS) or the Simple Asset Class ETF Value Strategy (SACEVS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for FXE and the asset class proxies since February 2006 as available through June 2026, we find that:Keep Reading
How do different asset classes interact with U.S. dollar valuation? To investigate, we consider relationships between Invesco DB US Dollar Index Bullish Fund (UUP) and the exchange-traded fund (ETF) asset class proxies used in the Simple Asset Class ETF Momentum Strategy (SACEMS) or the Simple Asset Class ETF Value Strategy (SACEVS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for UUP and the asset class proxies since March 2007 as available through June 2026, we find that:Keep Reading
Is the Buffett Indicator, the ratio of total U.S. stock market capitalization (proxied by Wilshire 5000 Total Market Index W5000) to U.S. Gross Domestic Product (GDP), a useful indicator of future U.S. stock market performance? W5000/GDP clearly has no stable average value over its available history (see the first chart below), so the level of the ratio is likely not a useful predictor. We therefore also consider the following variables based on W5000/GDP as predictors of W5000 returns at horizons up to two years:
Quarterly change in W5000/GDP.
Average quarterly change in W5000/GDP over the past two years (eight quarters).
Average quarterly change in W5000/GDP over the past five years (20 quarters).
Slope of W5000/GDP over the past two years.
Slope of W5000/GDP over the past five years.
We consider two kinds of tests: (1) a linear test relating these variables to future W5000 returns up to two years; and, (2) a non-linear test calculating average next-quarter W5000 returns by ranked fifths (quintiles) of in these variables. Using quarterly levels of W5000 (with extension), Shiller’s P/E10 lagged by one quarter (for comparison) and quarterly GDP lagged by one quarter during the first quarter of 1971 through the first quarter of 2026, we find that:Keep Reading
Can investors extract an edge from prediction markets such as Kalshi, the first (2021) Commodity Futures Trading Commission (CFTC)-regulated exchange that trades on outcomes of future events including consumer price index (CPI), federal funds rate (FFR), gross domestic product (GDP) and unemployment? In their February 2026 paper entitled “Kalshi and the Rise of Macro Markets”, Anthony Diercks, Jared Katz and Jonathan Wright evaluate the accuracy of Kalshi forecasts, with comparisons to outputs of traditional survey and market-implied forecasts. They further examine how Kalshi forecast distributions respond to economic news. Using high-frequency Kalshi prediction contract data for a broad set of economic variables during 2022-2025, they find that:Keep Reading
What are current estimates of equity risk premiums (ERP) and risk-free rates around the world? In their April 2026 paper entitled “Survey: Market Risk Premium and Risk-Free Rate used for 97 countries in 2026”, Pablo Fernandez, Amir Habibian and Lucia Acin summarize results of a March-April 2026 email survey of international finance and economic professors, analysts and company managers about the risk-free rate and the Market Risk Premium (MRP) used to calculate the required return to equity in different countries. Results are in local currencies. Based on 3,637 specific and credible premium estimates spanning 97 countries for which there are at least eight estimates, they find that:Keep Reading
Will the relatively high U.S. stock valuation ratios observed over the past few decades revert, or are they persistent artifacts of fundamental shifts in the U.S. economy? In their January 2026 paper entitled “A Macroeconomic Perspective on Stock Market Valuation Ratios”, Andrew Atkeson, Jonathan Heathcote and Fabrizio Perri examine the interplay between economic data (share of labor in corporate output and corporate investment/capital base) and stock market valuation ratios. They derive aggregate U.S. corporate value from the Integrated Macroeconomic Accounts (IMA). Their measure of enterprise value differs from stock market capitalization in two ways:
It is insensitive to the mix of debt and equity used for firm financing.
It includes estimated value U.S. subsidiaries of foreign multinationals and excludes estimated value of the foreign subsidiaries of U.S. multinationals. Thus, it measures the value of entities filing U.S. corporate tax returns.
Using U.S. economic and corporate valuation data during January 1952 through September 2025, they find that:Keep Reading
Do forecasts of U.S. deficits and debt portend doom? In their November 2025 paper entitled “Then and Now: A Look Back and Ahead at the Federal Budget”, Alan Auerbach and William Gale estimate future U.S federal deficits and debt. They consider three views of deficits and associated debt (see the chart below):
Unified deficit – difference between all federal spending and revenues.
Cyclically adjusted unified deficit – adjusts unified deficit according to the state of the economy. During recessions, spending rises as more people seek government benefits, while revenue falls as incomes decline. At the same time, discretionary policies tend to move in the same direction.
Primary deficit – difference between federal non-interest spending and revenues.
They discuss economic ramifications of debt and different ways to address the U.S. fiscal situation. Using deficit, debt and Gross Domestic Product (GDP) data during 1965 through 2024, plus projections from economic models, they conclude that:Keep Reading
Become a CXO Member
Gain access to hundreds of premium investing research articles and CXO's trading strategies
