Economic Indicators

A subscriber noted and asked: “Michigan (at one point) claimed that the inflation expectations part of their survey of consumers was predictive. That was from a paper long ago. I wonder if it is still true.” To investigate, we relate “Expected Changes in Prices During the Next Year” (expected annual inflation) from the monthly final University of Michigan Survey of Consumers and actual U.S. inflation data based on the monthly non-seasonally adjusted consumer price index (U.S. city average, All items). The University of Michigan releases final survey data near the end of the measured month. We consider two relationships:

• Expected annual inflation versus one-year hence actual annual inflation.
• Monthly change in expected annual inflation versus monthly change in actual annual inflation.

As a separate (investor-oriented) test, we relate monthly change in expected annual inflation to next-month total returns for SPDR S&P 500 (SPY) and iShares Barclays 20+ Year Treasury Bond (TLT). Using monthly survey/inflation data since January 1978 (limited by survey data) and monthly SPY and TLT total returns since July 2002 (limited by TLT), all through October 2021, we find that: Keep Reading

Do U.S. non-farm job openings, a measurement from the Job Openings and Labor Turnover Survey run monthly by the U.S. Bureau of Labor Statistics, have implications for future U.S. stock market return? High (low) job openings rate may indicate a strong (weak) economy and/or may signal high (low) wage inflation. To investigate, we relate job openings to performance of SPDR S&P 500 (SPY) as a proxy for the stock market. Using monthly job openings (which has a release delay of about six weeks) during December 2000 through September 2021 and monthly dividend-adjusted returns for SPY during December 2000 through October 2021, we find that: Keep Reading

Since May 2006, the ADP National Employment Report has offered a monthly estimate of U.S. nonfarm private sector employment growth using actual payroll data. The report is designed “to predict private-sector employment prior to the release of the CES [Bureau of Labor Statistics’ monthly Current Employment Statistics survey] report.” Do the ADP estimates predict U.S. stock market returns on the release day or over the interval to the next report? To investigate, we use both as-released (from press releases) and as-revised ADP data (from the historical dataset), calculated as percentage changes relative to the prior-month private employment base in the latter. Using the specified monthly data and matched daily opening/closing and dividend-adjusted closing prices of SPDR S&P 500 (SPY) during April 2006 through October 2021, we find that: Keep Reading

The monthly Cass Freight Index is a “measure of North American freight volumes [shipments] and expenditures… Data within the Index includes all domestic freight modes and is derived from $28 billion in freight transactions processed by Cass annually on behalf of its client base of hundreds of large shippers. These companies represent a broad sampling of industries including consumer packaged goods, food, automotive, chemical, OEM, retail and heavy equipment… The diversity of shippers and aggregate volume provide a statistically valid representation of North American shipping activity. …Volumes represent the month in which transactions are processed by Cass, not necessarily the month when the corresponding shipments took place. The January 1990 base point is 1.00. …Each month’s volumes are adjusted to provide an average 21-day work month. Adjustments also are made to compensate for business additions/deletions to the volume figures.” Cass typically publishes the index level for a month about the middle of the following month. Does freight data usefully anticipate economic trend and thereby U.S. stock market returns? To investigate, we relate level of shipments and changes in shipments and expenditures to SPDR S&P 500 (SPY) returns. Using monthly Cass Freight Index levels and monthly dividend-adjusted SPY returns as available during January 1993 (limited by inception of SPY) through October 2021, we find that: Keep Reading

Does the U.S. employment quit rate, a measurement from the Job Openings and Labor Turnover Survey run monthly by the U.S. Bureau of Labor Statistics, have implications for future U.S. stock market or U.S. Treasury bond return? A high (low) quit rate may indicate a strong (weak) economy and/or may signal high (low) wage inflation. To investigate, we relate quit rate to future performance of SPDR S&P 500 (SPY) as a proxy for the stock market and of iShares 20+ Year Treasury Bond (TLT) as a proxy for government bonds. Using monthly quit rate (which has a release delay of about six weeks) during December 2000 through August 2021 and monthly dividend-adjusted returns for SPY and TLT as available during December 2000 through September 2021, we find that: Keep Reading

A subscriber asked whether risk assets tend to struggle for about two years after low values of the ratio of corporate debt to Gross Domestic Product (GDP). To investigate, we use Non-financial Corporate Debt Securities and Loans as a proxy for corporate debt. Both debt and GDP series are quarterly, seasonally adjusted and have release delays of about one quarter. We then form the corporate debt-to-GDP ratio and relate its behavior to that of the S&P 500 Index. Using quarterly data for the three series from the fourth quarter of 1951 (limited by availability of quarterly data for the debt series) through the second quarter of 2021 for the economic/financial series and the third quarter of 2021 for the S&P 500 Index, we find that: Keep Reading

Do any of the major U.S. stock market sectors systematically lead or lag the overall market, perhaps because of some underlying business/economic cycle? To investigate, we examine the behaviors of the nine sectors defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR) exchange traded funds (ETF):

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

Using monthly dividend-adjusted closing prices for these ETFs, along with contemporaneous data for SPDR S&P 500 (SPY) as a benchmark, during December 1998 (sector ETF inception) through August 2021, we find that: Keep Reading

In response to “Combining SMA10 and Sahm Indicator”, a subscriber asked for a comparison of signals generated by the Sahm Recession Indicator (Sahm) and by yield curve inversion. The former signals a recession when the 3-month simple moving average (SMA) of the U.S. unemployment rate is at least 0.5% higher than its low during the last 12 months. The latter signals a recession when the yield on the 3-month U.S. Treasury bill (T-bill) rises above the yield on the 10-year U.S. Treasury note (T-note). To investigate, we calculate average monthly returns and standard deviations of monthly returns for the S&P 500 Index (SP500):

• When Sahm does not indicate a recession and, separately, when it does.
• When the yield curve does not indicate a recession and, separately, when it does.
• When SP500 is below its 10-month SMA (SMA10) and, separately, when it is above (for additional perspective).

Using end-of-month levels of SP500 since March 1959, Sahm levels since inception in December 1959 (history vintage 8/6/2021) and T-bill and T-note yields since December 1959, all through July 2021, we find that:

Keep Reading

A subscriber asked about a stock market timing strategy that combines the market 10-month simple moving average (SMA10) and the Sahm Recession Indicator (Sahm), which signals the start of a recession when the 3-month SMA of the U.S. unemployment rate is at least 0.5% higher than its low during the last 12 months. Specifically, the strategy:

• Holds the S&P 500 Index (SP500) unless it is below its SMA10 and Sahm first signals a recession.
• Subsequently holds cash until SP500 crosses above its SMA10.

To investigate, we compare three alternative strategies:

1. SP500 – buy and hold the index.
2. SMA10 – hold the index only while it is above its SMA10 and otherwise hold cash.
3. SMA10+Sahm – combined signals as specified above.

We focus on average monthly return, standard deviation of monthly returns, monthly reward/risk (average return divided by standard deviation), compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as key performance metrics. Using end-of-month levels of SP500 since March 1959, Shiller’s monthly SP500 dividends (to estimate SP500 total returns) since January 1960, Sahm since inception in December 1959 (history vintage 8/6/2021) and T-bill yield since December 1959, all through July 2021, we find that:

Keep Reading

Does the Misery Index, the sum of the U.S. total inflation rate and the U.S. unemployment rate, predict U.S. stock market returns? To investigate, we relate monthly Misery Index and monthly change in Misery Index to monthly S&P 500 Index (SP500) returns. Using monthly Misery Index level and monthly SP500 level during January 1948 (limited by the Misery Index) through June 2021, we find that: Keep Reading