The relationship between market sentiment and macro-economic indicators has always been an intriguing topic amongst newspaper columnists, academics, economists, and policymakers; especially when the economy is going through a recession. Calculating sentiment from financial news is a more timely method than traditional macro-economic indicators and thus could potentially improve trading models that build on macro-economic variables. Considering the correlation between the quarterly change of the macro-economic indicators and the quarterly change of RavenPack’s Sentiment Index, we arrive at the following key results:
- The RavenPack Sentiment Index is consistently positively correlated with the macro-economic indicators applying zero lag (including Real GDP, Inventory to Sales Ratio, Inventories, Retail Sales, the Michigan Consumer Confidence Index, and Personal Consumption Expenditures).
- The contemporaneous correlation between the quarterly change of the RavenPack Sentiment Index and the quarterly change of real GDP is 56%. Applying up to three lags improves the overall correlation to nearly 70%, with a 87% correlation since 2005.
- The RavenPack Sentiment Index is highly correlated with the University of Michigan Consumer Confidence Index (41%) - suggesting the complementarities of the RavenPack Sentiment Index to this traditional sentiment measure.
- The contemporaneous correlations with the macro-economic indicators are much higher for the RavenPack Sentiment Index than for the University of Michigan Consumer Confidence Index - suggesting that the RavenPack Sentiment Index could be a better sentiment measure.
- The lagged RavenPack Sentiment Index quarterly change is highly correlated with real GDP and inventory changes - suggesting a potential forecasting power of the RavenPack Sentiment Index for the macro-economy.
In Fig 1, we have plotted the real vs. predicted U.S. GDP growth since January 2001 through July 2011.
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