Abstract
We examine the ability of the Index of Consumer Sentiment (ICS) to predict stock returns over subsequent 11 months and to explain the other January effect (OJE) puzzle (stock returns in January predicting monthly returns for the remainder of the year). We find that the change in the ICS in January predicts the subsequent 11 months returns and the 11-month holding-period returns and when controlling for this prediction, the stock return OJE vanishes. The empirical results suggest that such predictive power of the ICS may derive from the correlation between the ICS and the unexpected proportion of equity mutual fund net cash flow in the subsequent 11 months.
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