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Consumer sentiment and the stock market

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  • Maria W. Otoo
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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 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.

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    File URL: http://www.federalreserve.gov/pubs/feds/1999/199960/199960abs.html
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    File URL: http://www.federalreserve.gov/pubs/feds/1999/199960/199960pap.pdf
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1999-60.

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    Date of creation: 1999
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    Handle: RePEc:fip:fedgfe:1999-60

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    Related research

    Keywords: Stock market ; Stock - Prices ; Consumer behavior;

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    1. Maria Ward Otoo, 1997. "The sources of worker anxiety: evidence from the Michigan survey," Finance and Economics Discussion Series 1997-48, Board of Governors of the Federal Reserve System (U.S.).
    2. Martha Starr-McCluer, 1998. "Stock market wealth and consumer spending," Finance and Economics Discussion Series 1998-20, Board of Governors of the Federal Reserve System (U.S.).
    3. Poterba, J.M. & Samwick, A.A., 1996. "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Working papers 96-2, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
    5. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, vol. 84(5), pages 1397-1408, December.
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