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Personal Savings Rate and the Stock Market

| | Posted in: Economic Indicators

In a past entry in his blog, guru Marc Faber observes: “There seems to be an inverse relationship between the savings rate and the stock market performance. When the savings rate is declining it is favorable for equities whereas when savings rate is increasing such as was the case in the late 1960’s, early 1980’s, and now, stock prices tend to move sideward or down.” Is this belief correct? If so, can investors exploit it? To check, we relate the U.S. personal saving rate as estimated quarterly by the Bureau of Economic Analysis (as a percentage of disposable personal income) to the quarterly change in the S&P 500 Index. Using data from the first quarter of 1950 through the first quarter of 2012 (249 quarters), we find that:

The following chart compares the behaviors of the S&P 500 Index and the personal saving rate based on quarterly data over the entire sample period. The personal saving rate, while volatile, generally rises from the 1950s through the 1970s and declines from the 1980s through the mid-2000s. It jumps up during the recent financial crisis but may be resuming a secular decline. Visual inspection indicates no consistent relationship between the stock market and the personal saving rate.

For precision, we relate stock market return to the personal saving rate.

The following scatter plot relates the quarterly return for the S&P 500 Index to the prior-quarter personal saving rate over the entire sample period. The Pearson correlation for the two series is 0.01 and the R-squared statistic is 0.00, indicating no meaningful relationship between next-quarter stock market return and the personal saving rate.

Might the quarterly change in the personal saving rate be more informative?

The next scatter plot relates the quarterly return for the S&P 500 Index to the prior-quarter change in the personal saving rate over the entire sample period. The Pearson correlation for the two series is -0.07 and the R-squared statistic is 0.005, indicating a very slight negative relationship between next-quarter stock market return and change in the personal saving rate (with the change in personal saving rate explaining less than 1% of the variation in stock market return).

To assess materiality and non-linearity in the relationship, we consider stock market future return by range of change in personal saving rate.

The next chart summarizes average next-quarter S&P 500 Index return by quintile of quarterly change in the personal saving rate over the entire sample period. Results suggest that drops  in the personal saving rate may be better than jumps, but the progression across quintiles is not systematic, and jumps in the saving rate do not clearly signal an exit from stocks.

As a final test, we look at other lead-lag relationships for stock market performance and the change in personal saving rate.

The final chart summarizes correlations for various lead-lag relationships between S&P 500 Index quarterly return and the change in quarterly personal saving rate over the entire sample period, ranging from stocks lead the change in personal saving rate by six quarters (-6) to the change in personal saving rate leads stocks by six quarters (6). Results suggest that:

  • A stock market advance (decline) over the past two quarters may have a slight tendency to depress (boost) the personal saving rate.
  • An increase (decrease) in the personal saving rate may have a slight tendency to boost (depress) the stock market over the next two quarters.

As suggested above, the latter tendency appears too weak to exploit.

In summary, evidence from several simple tests supports little belief in an exploitable relationship between the U.S. stock market and the U.S. personal saving rate.

Cautions regarding findings include:

  • The above analyses are in-sample. An investor operating in real time may have drawn different conclusions about the relationship between stock market return and personal saving rate based strictly on available data.
  • There is a one to three month lag in release of advance, preliminary and final values of the personal saving rate, so an investor could apply the final personal saving only with a lag of two quarters or more (leads 2 or greater in the last chart).
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