Economic Indicators

The inflation rate is a fundamental determinant of the discount rate used to calculate the present value of an asset. Changes in inflation therefore affect asset valuations. Do experts, as polled in the quarterly Survey of Professional Forecasters, offer accurate U.S. inflation forecasts that thereby indicate asset valuation changes? Survey report release dates are mid-quarter. For example, the release date of the first quarter 2024 report is February 9, 2024, forecasting inflation for the next 12 months. Forecasts are either GDP-based or CPI-based. To test their accuracies, we relate these forecasts to actual CPI-based inflation rates 12 months later based on mid-quarter releases. Using quarterly forecast data since the second quarter of 1970 for GDP-based forecasts and the third quarter of 1981 for CPI-based forecasts and associated actual inflation rates, all through mid-February 2024, we find that: Keep Reading

Is an investment strategy that follows trends in economic fundamentals (rather than asset prices) an attractive alternative to conventional momentum? In their January 2024 paper entitled “Economic Trend”, Jordan Brooks, Noah Feilbogen, Yao Hua Ooi and Adam Akant test a strategy that shifts allocations to equity, bond, currency and commodity futures/forwards series based on trends in five important global economic fundamentals, as follows:

• Growth – 12-month change in GDP growth forecast (increasing growth is good for equities, currencies and commodities, but bad for bonds).
• Inflation – 12-month change in CPI-based inflation forecasts (increasing inflation is good for currencies and commodities, but bad for equities and bonds).
• International trade – 12-month change in local spot currency exchange rate versus an export-weighted basket (increasing international trade is good for equities, but bad for bonds, currencies and commodities).
• Monetary policy – 12-month change in 2-year bond yield (increasing yield is good for currencies, but bad for equities, bonds and commodities).
• Risk aversion – equal-weighted 12-month trailing stock market return and 12-month change in credit spread (increasing risk aversion is good for equities, currencies and commodities, but bad for bonds).

When the above variables are unavailable, they use substitutes. They consider: (1) single-class, equal risk-weighted portfolios based on all five economic fundamental trends; (2) single-fundamental portfolios positioned across all four asset classes; and, (3) an equal risk-weighted composite of all single-class portfolios (the full Economic Trend strategy). For comparison, they form similar portfolios based on equal-weighted 1-month, 3-month and 12-month trailing asset returns. Composite portfolios (both economic trend and price trend) each month target 10% constant volatility based on the last three years of asset class returns. Using economic fundamentals data and monthly prices as available for 15 global equity futures, 9 bond futures, 7 interest rate futures, 8 currency forwards and 20 commodity futures series during January 1970 through December 2022, they find that: Keep Reading

Which comes first, adjustments in U.S. Treasuries yields across the term structure, or government announcement of new U.S. inflation data? To investigate, we relate monthly changes in yields for 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year and 30-year U.S. Treasuries (GS1 through GS30) to monthly change in overall raw Consumer Price Index (CPI) for various leads and lags. Using monthly yields (average daily yields during a month) for Treasuries as available and monthly CPI during April 1953 through December 2023, we find that:

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Do Federal Funds Rate (FFR) actions taken by the Federal Reserve open market operations committee reliably predict stock market and U.S. Treasuries yield reactions? To investigate, we use the S&P 500 Index (SP500) as a proxy for the stock market and the yield for the 10-Year U.S. Constant Maturity Treasury note (T-note). We look at index returns and changes in T-note yield during the one and two months after FFR actions, separately for FFR increases and FFR decreases. Using data for the three series during January 1990 through December 2023, we find that:

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The Conference Board “publishes leading, coincident, and lagging indexes designed to signal peaks and troughs in the business cycle for major economies around the world,” including the widely cited Leading Economic Index (LEI) for the U.S. Does LEI predict stock market behavior? Using the as-released monthly change in LEI from archived Conference Board press releases and contemporaneous dividend-adjusted daily levels of SPDR S&P 500 (SPY) for June 2002 through November 2023 (257 monthly LEI observations), we find that: Keep Reading

Is public saving rate a leading indicator of the stock market? Arguably, an increase (decrease) in saving rate means a shift away from (toward) consumption, corporate earnings and associated stock value. The Bureau of Economic Analysis (BEA) releases seasonally adjusted Personal Saving Rate (PSR) monthly with a lag of about one month for initial release and two additional months for revisions. Using this series and monthly S&P 500 Index level during January 1959 through September 2023, we find that…
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A reader asked: “Is disposable income a leading indicator of the stock market?” Arguably, an increase in disposable income could spur consumption, corporate earnings and associated stock values. The Bureau of Economic Analysis (BEA) releases seasonally adjusted Disposable Personal Income (DPI) monthly with a lag of about one month for initial release and two additional months for revisions. Using this series and monthly S&P 500 Index level during January 1959 through September 2023, we find that…

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How do individual asset classes react to monthly inflation indications? To investigate, we relate future monthly returns for the following 10 asset class exchange-traded fund (ETF) proxies to monthly changes in the U.S. Consumer Price Index (CPI):

• Equities:
  • SPDR S&P 500 (SPY)
  • iShares Russell 2000 Index (IWM)
  • iShares MSCI EAFE Index (EFA)
  • iShares MSCI Emerging Markets Index (EEM)
• Bonds:
  • iShares Barclays 20+ Year Treasury Bond (TLT)
  • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
  • iShares JPMorgan Emerging Markets Bond Fund (EMB)
• Real assets:
  • Vanguard REIT ETF (VNQ)
  • SPDR Gold Shares (GLD)
  • Invesco DB Commodity Index Tracking (DBC)

Using monthly CPI data (all items) and monthly dividend-adjusted returns for the above 10 asset class proxy ETFs as available from July 2002 through September 2023, we find that: Keep Reading

Does quantified uncertainty in government economic policy reliably predict stock market returns? To investigate, we consider the U.S. Economic Policy Uncertainty (EPU) Index, created by Scott Baker, Nicholas Bloom and Steven Davis and constructed from three components:

1. Coverage of policy-related economic uncertainty by prominent newspapers.
2. Number of temporary federal tax code provisions set to expire in future years.
3. Level of disagreement in one-year forecasts among participants in the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters for both (a) the consumer price index (CPI) and (b) purchasing of goods and services by federal, state and local governments.

They normalize each component by its own standard deviation prior to 2012 and then compute a weighted average of components, assigning a weight of one half to news coverage and one sixth each to tax code uncertainty, CPI forecast disagreement and government purchasing forecast disagreement. They update the index monthly at the beginning of the following month, potentially revising recent months. Using monthly levels of the EPU Index and the S&P 500 Index during January 1985 through August 2023, we find that: Keep Reading

Each month, the Institute for Supply Management (ISM) each month generates the Services Purchasing Managers Index (PMI), aggregating monthly inputs from purchasing and supply executives in services firms across the U.S. regarding business activity, new orders, employment and supplier deliveries. ISM releases Services PMI for a month on the third business day of the following month. Does the monthly level of Services PMI or the monthly change in Services PMI predict U.S. stock market returns? Using monthly seasonally adjusted Services PMI data during January 2008 through January 2016 from the Federal Reserve Bank of St. Louis and from press releases thereafter through August 2023, and contemporaneous monthly S&P 500 Index closes, we find that: Keep Reading