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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Does commercial and industrial (C&I) credit fuel business growth and thereby drive the stock market? To investigate, we relate changes in credit standards from the Federal Reserve Board’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices to future U.S. stock market returns. Presumably, loosening (tightening) of credit standards is good (bad) for stocks. The Federal Reserve publishes survey results a few days after the end of the first month of each quarter (January, April, July and October). Using as-released “Net Percentage of Domestic Respondents Tightening Standards for C&I Loans” for large and medium businesses from the Senior Loan Officer Opinion Survey on Bank Lending Practices Chart Data for the second quarter of 1990 through the fourth quarter of 2023 (136 surveys), and contemporaneous S&P 500 Index quarterly returns (aligned to survey months), we find that: Keep Reading

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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Does the level of, or change in, the annual U.S. federal surplus/deficit systematically influence the U.S. stock market, perhaps by affecting consumption and thereby corporate earnings or by modifying inflation and thereby discount rates? To check, we relate annual stock market returns to the annual surplus/deficit (receipts minus outlays) as a percentage of Gross Domestic Product (GDP). We align stock market returns with surplus/deficit calculations (federal fiscal years, FY) as follows: (1) prior to 1977, we calculate annual returns from July through June; (2) we ignore the July 1976 through September 1976 transition quarter; and, (3) since 1977, we calculate annual returns from October through September. Using surplus/deficit data and monthly returns for the S&P 500 Index (SP500) as a proxy for the U.S. stock market during FY 1930 through FY 2023 (about 94 years), we find that: Keep Reading

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