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posted on 22 May 2016

Stock Market Provides Imperfect View Of Real U.S. Economy

from the Dallas Fed

-- this post authored by Julieta Yung

The decline of the Standard & Poor's 500 Index at the beginning of 2016 raised concerns about the state of the U.S. economy. The index, viewed as a broad measure of U.S. equity values, dropped 10 percent amid slumping oil prices and a slowdown in China and other leading emerging economies.

While tracking developments in equity markets can provide clues to the health of the economy, extracting these signals through market turbulence is notoriously difficult. Nobel laureate Paul Samuelson notably opined on the perils of relating equity markets to overall economic activity: "The stock market has forecast nine of the last five recessions." As if to illustrate the difficulties, the S&P 500 bounced back by the end of the first quarter, retracing much of its earlier decline.

Although equity market volatility has abated, underlying risks remain broadly unresolved. What can the early-2016 S&P 500 fall tell us about the state of the U.S. economy, and why is it so difficult to interpret short-term fluctuations in the stock market?

A simple goods-versus-services decomposition reveals important differences between the aggregate U.S. economy and the stock market. These T Stock Market Provides Imperfect View of Real U.S. Economy by Julieta Yung differences help explain why changes in equity markets do not necessarily reflect changes in macroeconomic fundamentals or automatically signal economic downturns. Further exploring the makeup of S&P 500 companies suggests that the largest declines in equity value experienced at the beginning of 2016 were mostly concentrated in the energy sector.

[click on image below to continue reading]

Source: http://dallasfed.org/ assets/ documents/ research/e clett/ 2016/ el1604.pdf

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