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.
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
The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for March 2026. The actual total (core) inflation rate is much higher than (about the same as) forecasted.
“Using the Money Anxiety Index for ETF Selection” examines whether the proprietary Money Anxiety Index (MAI) can select long and short portfolios of ETFs that beat the S&P 500 Index (ignoring dividends). Test outputs are 5-year, 3-year and 1-year cumulative returns. A deeper look at performance may be helpful. We extend the test period by 30 months and focus on the full period. We consider SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust (QQQ), which is much more like the MAI-selected ETFs, as benchmarks. We compute monthly total return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using beginning-of-month, dividend-adjusted prices for the 10 ETFs in the MAI portfolios and the two benchmarks from the beginning of May 2018 through the beginning of March 2026, we find that:Keep Reading
How do returns of different asset classes recently interact with inflation as measured by monthly change in the not seasonally adjusted, all-commodities producer price index (PPI) from the U.S. Bureau of Labor Statistics? To investigate, we look at lead-lag relationships between change in PPI and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:
Using monthly total PPI values and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through January 2026, we find that:Keep Reading
Does commercial and industrial (C&I) credit fuel business growth and thereby drive the stock market? To investigate, we relate changes in credit standards from the Federal Reserve Board’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices to future U.S. stock market returns. Presumably, loosening (tightening) of credit standards is good (bad) for stocks. The Federal Reserve publishes survey results a few days after the end of the first month of each quarter (January, April, July and October). Using as-released “Net Percentage of Domestic Respondents Tightening Standards for C&I Loans” for large and medium businesses from the Senior Loan Officer Opinion Survey on Bank Lending Practices Chart Data for the second quarter of 1990 through the fourth quarter of 2025 (144 surveys), and contemporaneous S&P 500 Index quarterly returns (aligned to survey months), we find that: Keep Reading
A subscriber requested confirmation of the following relationship between U.S. M2 Money Stock and gold offered in “Why Gold May Be Looking Cheap”: “[O]ne measure I’ve found useful is the ratio of the price of gold to the U.S. money supply, measured by M2, which includes cash as well as things like money market funds, savings deposits and the like. The logic is that over the long term the price of gold should move with the change in the supply of money… That equilibrium level is also relevant for future price action. When the ratio is low, defined as 25% below equilibrium, the medium 12-month return has been over 12%. Conversely, when the ratio is high, defined as 25% above equilibrium, the 12-month median return has been -6%. …This measure can be refined further. [G]old tends to trade at a higher ratio to M2 when inflation is elevated.” Because it retrospectively defines specific valuation thresholds using the full sample, this approach impounds lookahead bias and data snooping bias in threshold selection. We consider an alternative setup that relates monthly change in M2 to monthly gold return. We also consider the effect of inflation on this relationship. Using monthly seasonally adjusted M2 and spot gold price as available during December 1974 (to ensure a free U.S. gold market) through September 2025, we find that:
Conventional wisdom holds that a steep yield curve (wide U.S. Treasuries term spread) is good for stocks, while a flat/inverted curve is bad. Is this wisdom correct and exploitable? To investigate, we consider in-sample tests of the relationships between several yield curve metrics and future U.S. stock market returns and two out-of-sample signal-based tests. Using average monthly yields for 3-month Treasuries (T-bill), 1-year Treasuries, 3-year Treasuries, 5-year Treasuries and 10-year Treasuries (T-note) as available since April 1953, monthly levels of the S&P 500 Index since April 1953 and monthly dividend-adjusted levels of SPDR S&P 500 (SPY) since January 1993, all through September 2025, we find that:Keep Reading
Since January 2010, the ADP National Employment Report, in collaboration with the Stanford Digital Economy Lab, has published a monthly estimate of U.S. nonfarm private sector employment using actual payroll data. “The ADP National Employment Report is an independent and high-frequency view of the private-sector labor market based on the aggregated and anonymized payroll data of more than 26 million U.S. employees.” Do ADP estimates usefully predict U.S. stock market returns at the monthly release frequency? To investigate, we relate monthly changes in raw ADP employment estimates and in seasonally adjusted ADP employment estimates to monthly SPDR S&P 500 ETF (SPY) total returns. Using the specified monthly data during January 2010 (limited by ADP data) through August 2025, we find that:
The U.S. Bureau of Economic Analysis (BEA) each quarter estimates economic growth via changes in Gross Domestic Product (GDP) and its Personal Consumption Expenditures (PCE), Private Domestic Investment (PDI) and government spending components. BEA releases advance, preliminary and final data about one, two and three months after quarter ends, respectively. Do these estimates of economic growth usefully predict stock market returns? To investigate, we relate economic growth metrics to S&P 500 Index returns. Using quarterly and annual seasonally adjusted nominal final GDP data from BEA National Income and Product Accounts Table 1.1.5 as available during January 1929 through September 2025 and contemporaneous levels of the S&P 500 Index, we find that:
