The stock market and the consumer confidence channel: evidence from Canada

Abstract

Two channels through which stock prices can affect consumption are wealth effects and shifts in consumer confidence. We examine the evidence for the latter channel for Canada, using consumer confidence survey data. The composition of households’ financial wealth between stock and pension funds holdings as well as the unique 6-month forecast horizon in the consumer confidence survey make Canada a particularly interesting case relative to the USA and the European countries. We find that both stock price changes and their volatility are significant predictors of consumer responses to questions that are unrelated to expectations of future personal finances, even after controlling for inflation, unemployment and interest rates. Moreover, there is a significant short-term increase in consumer pessimism after an unexpected rise in stock market volatility. Overall, the evidence for the confidence channel suggests that this channel can amplify the effects of the well-understood wealth channel. Consequently, it should be taken into account in determining quantitative impacts of the stock market on consumer behavior.