Consumer sentiment and the stock market

Maria Ward Otoo

No 1999-60, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: 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 examined 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.

Keywords: Stock market; Stock - Prices; Consumer behavior (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (52)

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