If true, and it seems to be, this bodes I’ll for growth this year.
More than any other indicator, the Fed should be paying close attention to the stock market—not to manipulate it, but because market indexes are among the best predictors of growth and employment. Fluctuations in market capitalization also affect consumption, shaping the path of gross domestic product. But the Fed's forecast of 2.3% growth this year despite sputtering U.S. stocks suggests it might not be giving sufficient weight to the market's predictive value.
The key to the markets' predictive power is their clear and stable relationship to growth. Data from the past four decades show that a 10% decrease in the S&P 500 over a period of either three or six months is associated with a decrease of about 0.5 percentage point in the following year's GDP growth.
