Macroeconomics Matter: Leading Economic Indicators and the Cross-Section of Global Stock Returns

Leading economic indicators assist in forecasting future business conditions, but can they predict aggregate stock returns? To answer this, we examine six decades of data from 39 countries. Past short-term changes in the composite leading indicator (CLI) positively correlate with future stock returns in the cross-section. The quintile of markets with top CLI increases outperforms the quintile with the lowest CLI change by 1.43% per month. The effect survives extensive robustness checks and cannot be explained by known predictors of country equity returns. Furthermore, it may be directly translated into exploitable investment strategies and be harvested with exchange-traded funds.