There are so many economic indicators around these days, that it can be overwhelming for non-specialists to know which ones matter. So here is a brief cheat sheet based on my experience and some work by Maria Viera at LSEG. First, always remember that markets move in reaction to surprises in economic data, not the data itself. If the consensus expectation for inflation is 3% and the data shows 3% inflation, you wouldn’t expect any major move in markets. If the consensus expectation is for inflation to come in at 2.5% and the data shows 3% inflation, you’d expect markets to move strongly.
“the linear regression analysis between the change in ‘liquidity’ (US bank reserves) and the S&P500 returns in the last 15 years […] we played around with time lags, outliers, return windows…everything. Bank reserves and stock markets both tend to go up over time and hence they look ‘correlated’, but analyzing the rate of change of liquidity and S&P 500 returns helps with smoothing this problem away. The result was consistently clear. A simple linear regression exercise tells us ‘liquidity’ is pretty bad at predicting stock market returns: as shown by the R squared data, in the last 15 years US liquidity only explained 3-4% (!) of the variation of SPX returns. So, yes: both series trended up over time, and plotting them on a dual-axis chart looks great but stocks go up over time because earnings grow and not because Central Banks pump ‘money’ in the ‘system’.”
Great post. I don't know how you generate such meaningful investment commentary every day but hats off to you, sir!
Well, this one was easy. I stole from someone else's research :-)
About the supposed correlation stock market-fed liquidity
https://themacrocompass.substack.com/p/the-liquidity-illusion
“the linear regression analysis between the change in ‘liquidity’ (US bank reserves) and the S&P500 returns in the last 15 years […] we played around with time lags, outliers, return windows…everything. Bank reserves and stock markets both tend to go up over time and hence they look ‘correlated’, but analyzing the rate of change of liquidity and S&P 500 returns helps with smoothing this problem away. The result was consistently clear. A simple linear regression exercise tells us ‘liquidity’ is pretty bad at predicting stock market returns: as shown by the R squared data, in the last 15 years US liquidity only explained 3-4% (!) of the variation of SPX returns. So, yes: both series trended up over time, and plotting them on a dual-axis chart looks great but stocks go up over time because earnings grow and not because Central Banks pump ‘money’ in the ‘system’.”