Investigating the relationship between stock market performance and economic performance in the United States

Abstract

In this study, the causal relationship and direction of the flow of causality between stock market performance and economic performance in the United States is examined. This research is done by means of quantitative analysis, through a number of statistical tests for the period between 1996 and 2020. The objective is to check whether there is causation and correlation between the variables and if there is, to examine the direction of their relationship. To investigate whether the variables are correlated, the Johansen’s cointegration technique is used. Then, the Granger causality test will be used to investigate the causal relationship between stock market performance and economic growth. As a measure of stock market performance, the S&P 500 index is utilised, and as economic performance indicators, Consumer Price Index, Real GDP, Long-Term Interest Rates and Unemployment Rates are used. The empirical results of this study show that there exists a uni-directional causal relationship between stock prices and the macroeconomic variables. However, the causality runs one-way from S&P 500 to Consumer Price Index, Real GDP, Long-Term Interest Rates and Unemployment Rate, but not the other way.