Stock markets cycles and macroeconomic dynamics

Abstract

There is a consensus that stock markets are procyclical. However, answers to some important questions remain unclear. Do stock markets lead or lag business cycles? More interestingly, what is the duration with which they lead or lag them? This study uses different time-series filters and time-difference analysis to answer these questions by examining the dynamic interactions between three major stock indices and key macroeconomic indicators in the United States. The findings show that stock markets have been strongly procyclical, lagging industrial production by one to three months in recent decades. There have been noteworthy changes in the relationship between inflation and stock market cycles. The correlations changed from negative in the 1980s and 1990s to positive in the 2000s and 2010s. The results also reveal close associations between the stock indices, offering new insights into the interplay between financial markets and economic cycles.