Daily Archives: Jan 14, 2022 at 07:16 am EST

Research Review | 14 January 2022 | Inflation

The Time-Varying Relation between Stock Returns and Monetary Variables
David G. McMillan (University of Stirling)
November 2, 2021
The nature of the relation between stock returns and the three monetary variables of interest rates (bond yields), inflation and money supply growth, while oft studied, is one that remains unclear. We argue that the nature of the relation changes over time and this variation is largely driven by shocks, with a change in risk associated with each variable shifting the pattern of behaviour. We show a change in the correlation between each of the three variables with stock returns. Notably, a predominantly negative correlation with bond yields and inflation becomes positive, while the opposite is true for money supply growth. The shift begins with the bursting of the dotcom bubble but is exacerbated by the financial crisis. Results of predictive regressions for stock returns also indicate a switch in behaviour. Predominantly negative predictive power switches temporarily to positive around economic shocks. This suggests that higher yields, inflation and money growth typically depress returns but support the market during periods of stress. However, after the financial crisis, higher inflation and money growth exhibit persistent positive predictive power and suggests a change in the risk perception of higher values.

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Macro Briefing: 14 January 2022

* Supreme Court blocks Biden virus mandate for big firms
* Russia says Ukraine talks at ‘dead end’
* Hack attack brings down government web site in Ukraine
* Omicron persuades economists to cut US growth outlook for Q1
* Veteran Wall St economist–“Dr Doom”–criticizes Fed policy re: inflation
* China trade surplus with US rose for second year in 2021
* Global surge in energy demand may lead to more market volatility, IEA warns
* US producer price inflation up 9.7% last year–highest since 2010
* US jobless claims rose last week to highest level since November: