Chicago Fed ANFCI as U.S. Stock Market Predictor

Referring to “Chicago Fed NFCI as U.S. Stock Market Predictor”, a subscriber asked whether the Federal Reserve Bank of Chicago’s Adjusted National Financial Conditions Index (ANFCI) may work better as a U.S. stock market predictor. ANFCI “isolates a component of financial conditions uncorrelated with economic conditions to provide an update on financial conditions relative to current economic conditions.” Positive (negative) values of the ANFCI are associated with financial conditions that are tighter (looser) than than those suggested by prevailing macroeconomic conditions, with degree measured in standard deviations from the mean. The Chicago Fed releases ANFCI each week as of Friday on the following Wednesday at 8:30 a.m. ET (or Thursday if Wednesday is a holiday), renormalized such that the full series always has a mean of zero and a standard deviation of one (thereby each week changing past values, perhaps even changing their signs). To investigate its usefulness as a U.S. stock market predictor, we relate ANFCI and changes in ANFCI to future S&P 500 Index returns. Using weekly levels of ANFCI and weekly closes of the S&P 500 Index during January 1971 (limited by ANFCI) through April 2020, we find that: (more…)