Consumer Sentiment and the Stock Market

20 Pages Posted: 21 May 2000

See all articles by Maria Ward Otoo

Maria Ward Otoo

Board of Governors of the Federal Reserve System

Date Written: November 1999

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

JEL Classification: D12

Suggested Citation

Ward Otoo, Maria, Consumer Sentiment and the Stock Market (November 1999). Available at SSRN: https://ssrn.com/abstract=205028 or http://dx.doi.org/10.2139/ssrn.205028

Maria Ward Otoo (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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