Macroeconomic shocks and stock market returns

Abstract

ABSTRACT We examine how structural macroeconomic disturbances impact US stock market returns. Our analysis uncovers a significant negative correlation between stock market returns and both systematic and monetary shocks. Our findings indicate that monetary policy shocks exert a substantial influence on US stock market returns. Forecast error variance decomposition of stock market returns shows systematic and monetary shocks explain 95% of stock return variance. An examination of industry-level stock returns indicates industries engaged in essential goods have greater resilience to shocks, indicating a reduced sensitivity to market fluctuations.