Stock Prices And Macroeconomic Data

Abstract

This paper examined the relationship between the total return on the S&P 500 index and various macroeconomic variables. The independent variables were the growth rates of corporate earnings, G.N.P., money supply (M1), S&P dividend yield, seasonally adjusted C.P.I., U.S. T-Bills (3 months), and the U.S. treasury composite. The 1968-1987 period was researched using time lags of zero to four quarters. In addition, the total S&P 500 total return and the growth rate of corporate earnings were studied for the 1973-1987 and the 1981-1987 periods utilizing zero to one year time lags. This study has shown that for the period 1968 through 1987, there was no significant relationship (.05 level) between macroeconomic data and the total return on the S&P 500 index with one exception. The exception was dividend yield using a six month time lag. This is consistent with past research that has shown a relationship between dividend yield and total return. When the growth rate of earnings was singled out, a negative relationship was found from 1973-1987 and from 1981-1987. This is a surprising result and is inconsistent with long term studies which support a consistent and significant relationship. The results show that for these periods, it would have been a futile exercise for professional managers to study and attempt to predict future economic data. Predicting the future is an impossible task with a consistent degree of accuracy, but this study indicates that even it if could have been done from 1968-1987, that it would not have guaranteed superior stock market results. If no relationship exists, then is it cost effective not to study the variables? This study discourages a market timing investment approach.