Impacts of Macroeconomic Variables on the U.S. Stock Market Index and Policy Implications

This paper finds that the U.S. stock market index is positively associated with real GDP, stock earnings, the trade-weighted nominal effective exchange rate, and the U.K. stock market index and negatively influenced by the government debt/GDP ratio, the M2/GDP ratio, the real Treasury bill rate, the real corporate bond yield, the expected inflation rate, and the U.K. Treasury bill rate. The choice of an appropriate exchange rate may affect empirical outcomes. Hence, we need more economic growth and better earnings to have higher stock prices. The rising government debt/GDP ratio is expected to hurt stock prices whereas the relatively low interest rate would help stock prices. A higher M2/GDP ratio reduces stock prices partly due to its potential impacts on inflation and interest rates. The recent depreciation of the U.S. dollar would work unfavorably to the U.S. stock market index.