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Should the “Anxious Index” Make Investors Anxious?

Posted in Economic Indicators, Investing Expertise

Since 1990, the Federal Reserve Bank of Philadelphia has conducted a quarterly Survey of Professional Forecasters. The American Statistical Association and the National Bureau of Economic Research conducted the survey from 1968-1989. Among other things, the survey solicits from economic experts probabilities of U.S. economic recession (negative GDP growth) during each of the next four quarters. The survey report release schedule is mid-quarter. For example, the release date of the fourth quarter 2018 report is November 13, 2018, with forecasts for the four quarters of 2019. The "Anxious Index" is the probability of recession during the next quarter. Are these forecasts meaningful for future U.S. stock market returns? Rather than relate the probability of recession to stock market returns, we instead relate one minus the probability of recession (the probability of good times). If forecasts are accurate, a relatively high (low) forecasted probability of good times should indicate a relatively strong (weak) stock market. Using survey results and quarterly S&P 500 Index levels (on survey release dates as available, and mid-quarter before availability of release dates) from the fourth quarter of 1968 through the fourth quarter of 2018 (201 surveys), we find that:

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