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
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Washington, DC 20551 USA
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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