Consumer credit is closely linked to economic performance. And when there is economic data lying around, you can be pretty sure that there is an economist trying to predict the stock market with it not far behind. Not long ago, we had a post that showed how the stock market led even the Leading Economic Index. The other day I saw a post at the always wonderful CXO Advisory correlating consumer credit with the stock market. Once again, it’s the stock market that leads, not the economy!
…annual stock market returns have a positive relationship with next-year consumer borrowing, explaining about 6% of next-year changes in consumer credit.
One might hypothesize that when the market goes up, people feel better about the economy and are willing to borrow. CXO provides a nice chart showing the relationship with the regression line.
Source: CXO Advisory (click to enlarge)
All of this is a good reminder: when you are dealing with the market, pay attention to market prices. Economic linkages often lag and assumptions about how they are linked to the market are often incorrect.
