Consumer Sentiment and the Stock Market
Maria Ward Otoo
Board of Governors of the Federal Reserve - Industrial Output Section
FEDS Working Paper No. 99-60
This paper examines the relationship between movements in consumer sentiment and stock prices. At the aggregate level, the two share a strong contemporaneous relationship an increase in equity values boosts sentiment. However, I also sought to examine the nature of the relationship between the two. Does an increase in stock prices raise aggregate sentiment because people are wealthier or because they use movements in stock prices as an indicator of future economic activity and potential labor income growth? Using individual observations from the Michigan survey I found results more consistent with the view that people use movements in equity prices as a leading indicator. Although the findings do not rule out a traditional wealth effect, they do raise some questions about the causal role of wealth in aggregate spending.
Number of Pages in PDF File: 20
Keywords: consumer sentiment, stock market, Michigan survey
JEL Classification: D12
Date posted: May 21, 2000
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