Abstract
State and local officials are often tasked with policy decisions that are influenced by projections of future economic conditions. However, properly assessing and predicting local economic performance is challenging. Common macroeconomic indicators can be helpful, but additional tools are needed. Stock indices have traditionally been used in the investment community to evaluate performance. While a recent surge in fundamental indexing has led to a debate over performance measurement, other uses of fundamental indices have been largely ignored. We introduce an employment-weighted stock index as a supplement to traditional forecasting measures for policymakers at the state and local levels.
Highlights
Stock market indices perform a variety of functions in the investment community
We introduce a fundamentally-weighted, local stock index based on employment data
Amidst the ongoing debate over whether fundamental indexing leads to outperformance, we propose a slightly different question
Summary
Stock market indices perform a variety of functions in the investment community. An investor may follow an index such as the S&P 500 or Dow Jones Industrial Average to monitor price changes in the overall market; a money manager may reference one or more indices as a benchmark for performance evaluation. An index that represents the broader market provides insight into investor beliefs about the direction of the broader economy, in the short-term. While the Dow Jones Industrial Average may still be the best known to the general public, other indices offer alternate assessments of the stock market based on company market capitalization, geographic location, and investment style. We introduce a fundamentally-weighted, local stock index based on employment data. We use the state of Arkansas as an example in offering a model that can be built and maintained at the state or local level
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