stox & spending

Doug Henwood dhenwood at panix.com
Thu Jun 8 10:40:03 PDT 2000


"Consumer Sentiment and the Stock Market"

BY: MARIA WARD OTOO

Board of Governors of the Federal Reserve System

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Paper ID: FEDS Working Paper No. 99-60

Date: November 1999

Contact: MARIA WARD OTOO

Email: Mailto:m1mwo00 at frb.gov

Postal: Board of Governors of the Federal Reserve System

Mail Stop 80

20th and Constitution Streets, NW

Washington, DC 20551 USA

Phone: (202)452-2236

Fax: (202)452-5296

Paper Requests:

Please indicate the title and the FEDS paper number. Single

copies of FEDS papers may be obtained upon request from Ms.

Karen Blackwell, Mailto:fedspapers at frb.gov Postal: Mail Stop 77,

Federal Reserve Board, Washington, DC 20551. Phone:(202)

452-2900. Fax:(202) 452-3819.

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 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.

Keywords: consumer sentiment, stock market, Michigan survey



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