Stock Market and Economic Growth in the U.S. & France: Evidence from Stock Market Sector Indices

Abstract

Many scientists have analyzed a relation among economic and financial market variables. One of the purposes of these researches, and probably the most important one, is to find a better prediction of future economic changes. Economic theory suggests a strong link between stock market and economic activity. The question is whether the stock market is a predictor of future economic activity measured as growth of country’s gross domestic product. In this paper we analyze which economic sectors, represented by stock market sector indices, could have most impact on GDP. The aim of this paper is to analyze whether some sectors are more important than others while analyzing GDP change. The study uses data for the period 2000 Q2 – 2012 Q1 of the U.S. seasonally adjusted GDP and Dow Jones indices and data for the period 2001 Q1 – 2012 Q1 of France seasonally adjusted GDP and Euronext CAC indices. In order to find a relation between selected stock market sector indices and GDP, we will use cross correlation analysis. Our findings support the theory that stock market is a leading indicator for economic growth. In France stock market appears to be a stronger indicator for economic growth compared to the U.S. The results revealed that seasonally adjusted GDP growth lagged behind changes in stock market indices four quarters in France and three quarter in the U.S. In the U.S. worst predictive capabilities for GDP growth come from utilities, oil and gas sectors. Industrial and financial sectors gave the best cross correlation results with GDP growth. In France telecommunication, utilities sectors have the worst predictive capabilities, and consumer services and health care sectors gave the best cross correlation results on GDP growth, compared with others. DOI: http://dx.doi.org/10.5755/j01.ee.25.1.1985