The relationship between macroeconomic variables and stock returns

Abstract

In an efficient market, stocks are not mispriced and therefore one is not in a position to benefit from over or undervalued stocks. However, away from the assumptions of an efficient market, investors and portfolio managers are continuously trying to generate profits from the imperfections of capital markets. This study aims to investigate the impact of five macroeconomic variables on the performance of the ten sectors of the S&P 500 Index within the United States. The macroeconomic variables used in this study were chosen after a deep analysis of past studies. Through regression analysis, this study evaluates the impact of inflation, exchange rate, interest rate, industrial production, and oil prices on sectoral stock returns. The exchange rate, inflation, interest rate, and oil prices were statistically significant in explaining at least movements in one of the sectors. With the exchange rate being the best predictor as it had a significant impact on nine sectors. Hence, this study concludes that these five macroeconomic variables are not the best factors in explaining movements in stock returns and hence, further research is required.