Using Asset Prices to Infer Economic Expectations and Market Risk

Summary

This research summary discusses how asset prices can reflect economic expectations before official data is released. It proposes comparing year-over-year changes in a basket of asset prices with economic indicators, and comparing asset-price changes with changes in the federal funds rate to assess whether policy expectations are reflected in markets. The report argues that economic variables can have momentum, while turning points and gaps between market expectations and later data create uncertainty. It describes historical co-movement and links asset valuations and market behavior to monetary policy, inflation expectations, and risk appetite.

Key ideas

• Asset prices may provide timely signals because economic data are published with a delay.
• Trend models based on economic indicators can benefit from persistence but are vulnerable at turning points and when expectations differ from reported data.
• The report uses asset baskets and economic series to assess how much expected growth or policy is reflected in prices.
• Its 2018 views cover equities, gold, oil, and agricultural commodities, but the document supplies no full methodology or current validation.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.