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On the relationship between stock prices and consumer confidence Stahan, Venere Gauvreau 1971

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ON THE RELATIONSHIP BETWEEN STOCK PRICES AND CONSUMER CONFIDENCE by Venere Gauvreau Stahan B.B.A., U n i v e r s i t y of Toledo, 1969 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION IN THE DEPARTMENT OF FINANCE We accept t h i s t h e s i s as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA In present ing th i s thes i s in pa r t i a l f u l f i lmen t of the requirements for an advanced degree at the Un ivers i ty of B r i t i s h Columbia, I agree that the L i b ra ry sha l l make i t f r ee l y ava i l ab le for reference and study. I f u r ther agree that permission for extens ive copying of th i s thes i s for s cho la r l y purposes may be granted by the Head of my Department or by h i s representat ives . It is understood that copying or pub l i ca t i on of t h i s thes i s f o r f i nanc i a l gain sha l l not be allowed without my wr i t ten permiss ion. Department of /~ LSVIS-L^I/P 0 , The Un iver s i t y o f B r i t i s h Columbia Vancouver 8, Canada Date j)u&X</97/ The purpose of t h i s i n v e s t i g a t i o n was to explore the r e l a t i o n s h i p between the general psychological mood of the population regarding the nationa l economy and i t s e f f e c t upon the l e v e l of stock market p r i c e s . I t was hypothesized that there should be evidence of a p o s i t i v e r e l a t i o n between the two. In an e f f o r t to explain stock p r i c e l e v e l s several models were constructed which contained various component v a r i a b l e s , among which were an Index of Consumer Mood, GNP, Corporate Earnings Before Tax, Money Supply and Canadian Government Long-Term Bond Interest Rates. A l l datum covered 38 quarters, from 3rd quarter I960 to 4th quarter 1969. From these v a r i a b l e s f i v e models were constructed containing three equations each. Five t e s t s were con-ducted on the f i v e i n d i v i d u a l models i n which the c o r r e l -ations, multiple regressions and polynomial d i s t r i b u t e d lags were measured. Various t e s t s contained data based on f i r s t d ifferences deflated values, r e l a t i v e differences and combinations thereof. ' A f i n a l t e s t was with the ex-c l u s i o n of the Consumer Mood v a r i a b l e i n order to Judge the e f f e c t i t s presence had made upon the accuracy of the equations. The conclusions based upon the r e s u l t s of the te s t s must i n i t i a l l y i n d i c a t e that the general psychological consumer attitude has l i t t l e bearing upon the l e v e l of stock p r i c e s . Deflated money supply however, proved to be highly relevant and a valuable p r e d i c t o r . The t o t a l picture presented by the models i s uns a t i s f a c t o r y , r e -quir i n g e i t h e r the s u b s t i t u t i o n of more accurate v a r i a b l e s or the i n c l u s i o n of fu r t h e r data to supplant the i n -e f f i c i e n c y of the v a r i a b l e s that were used. The compon-ents employed i n the t e s t s were both i n e f f i c i e n t i n some cases and i n s u f f i c i e n t i n others. The r e s u l t s must only i n d i c a t e areas f o r fu r t h e r i n v e s t i g a t i o n and refinement of the datum. Any general-i z a t i o n on the lack of s t a t i s t i c a l support f o r a r e l a t i o n -ship between consumer confidence and stock p r i c e s to the e f f e c t of consumer opinions about the economy as a whole would neither be reasonable nor j u s t i f i a b l e at t h i s time. ABSTRACT i CHAPTER I: INTRODUCTION 1 CHAPTER II: THE THEORY OF PSYCHOLOGICAL ECONOMICS 4 Keynes 4 Friedman 5 Katona 6 CHAPTER I I I : DATA AND STATISTICAL TESTS PERFORMED 15 Model I . .. . 18 Model II 20 Model I I I 21 Model IV 22 , Model V 23 CHAPTER IV: STATISTICAL TEST RESULTS AND ANALYSIS 24 Test I 25 Test I I 26 Test I I I 28 Test IV 31 Test V 33 CHAPTER V: CONCLUSIONS 35 BIBLIOGRAPHY 39 APPENDICES: I Correlation,Results-From A l l Tests 40 II - Regression Test Results . . . . 42 I I I - A Survey of Consumer Buying Intentions 58 Table Page I. CHARACTERISTICS OF THE SAMPLE '16 I I . RESULTS OF TEST #1 25 I I I . RESULTS OF TEST #2 26 If IV. RESULTS OF TEST #3 . . . 29 V. RESULTS OF TEST #4 32 VI. EFFECT OF REMOVAL OF CONSUMER MOOD VARIABLE 34 INTRODUCTION According to an emminent present day economist: The past few decades have seen the r i s e , .... of a new and unique phenomenon i n human h i s t o r y , the mass consumption socie t y . I t i s unique by v i r t u e of three major features: affluence, consumer power, and the im-portance of consumer psychology. In our economy consumer demand i s no longer a function of money alone. D i s c r e t -ionary demand, which has assumed a decisive economic r o l e , i s influenced and sometimes even determined by the consum-er's w i l l i n g n e s s to buy. In turn, the willingness to buy i s a r e f l e c t i o n of consumer motives, at t i t u d e s and ex-pectations.^" Katona has been doing research i n the area of con-sumer or psychological economics since the end of World War I I . The r e s u l t s of h i s studies have repeatedly i n d i c -ated forthcoming changes i n the n a t i o n a l economy and have often been i n d i r e c t contrast to those p r e d i c t i o n s made by groups of economists schooled i n the more established 1. George Katona, The Mass Consumption Society (New York: McGraw-Hill Book Company, Inc., 1964), p. 3. appr-oaches. He has stated the changes i n consumer a t t i -tudes represent a lead i n d i c a t o r to changes i n the rate of spending and to changes i n the type of spending the consumer w i l l pursue. Katona has never published h i s r e -search on e f f e c t of consumer at t i t u d e s upon t h e i r l e v e l of s e c u r i t y investment. The purpose of t h i s paper i s to investigate the ex-istence of a r e l a t i o n s h i p between the l e v e l of stock p r i c e s and the nation-wide economic attitude of the general con-sumer. F i r s t thoughts would tend to make one f e e l that there should, e x i s t some degree of a p o s i t i v e r e l a t i o n s h i p between the two. Interest i s to be broadly focused on two dichotomous areas: f i r s t l y , a p r i o r i reasons as to why stock pr i c e s and economic trends should respond to changes i n the psycho-l o g i c a l a t t i t u d e s of the consumer toward the future state of the economy; and secondly, empirical evidence of the i n v e s t i g a t i o n of such a r e l a t i o n s h i p . I t must be i n i t i a l l y stated, however, that the r e s u l t s of s t a t i s t i c a l t e s t i n g must be c a u t i o u s l y used with respect to g e n e r a l i z a t i o n to broader areas and may i n d i c a t e only f u r t h e r d i r e c t i o n f o r l o g i c a l i n v e s t i g a t i o n and reasoning. In Chapter II the basis of psychological economics i s discussed. The reasoning f o r i t s j u s t i f i c a t i o n i s con-t r a s t e d to the more established body of economic thought. I t i s concluded that there i s some purpose to be served by conducting a f u r t h e r i n v e s t i g a t i o n of an existent r e l a t i o n s h i p . In Chapter I I I the s t a t i s t i c a l t e s t s performed are l a i d out and the models are described. In Chapter IV the r e s u l t s of the t e s t s are pre-sented and analysed. Chapter V contains the conclusions. CHAPTER I I THE THEORY OP PSYCHOLOGICAL ECONOMICS Keynes I T r a d i t i o n a l l y , there have been two propositions concerning consumer incomes and expenditures which are i m p l i c i t i n economic a n a l y s i s . One being that consumer incomes are dependent upon government and business a c t i v -i t i e s . The other follows d i r e c t l y that the l e v e l of con-sumer spending depends upon the l e v e l of consumer income. Keynes has noted i n the past that the propensity to spend i s a r e l a t i v e l y stable function of income."'" Further, the s t a b i l i t y of the economic cycle i t s e l f i s highly relevant to the p r e v a i l i n g l e v e l of consumption. I f a growth period i s steady and consistent consumption should r i s e 2 i n d i r e c t proportion to increases i n income. From t h i s i t has been accepted that consumer spending i s p r i m a r i l y determined by the l e v e l of current income, or income earned i n the very recent past. " I f , however, the growth phase should develop by ra p i d leaps, consumption w i l l r i s e l e s s 1. George Katona, The Powerful Consumer (New York: McGraw H i l l Book Company, Inc., I960), p. 10. 2. A l v i n H. Hansen, Business Cycles and National Income (New York: W. W. Norton & Company, Inc., 1951), p. 166. than proportionately .... Such rapid leaps i n income can-not continue, however, f o r as soon as f u l l employment i s reached increases i n r e a l income w i l l slow down, then con-sumption w i l l adjust i t s e l f to the new l i v i n g standard ..."^ Friedman: Mil t o n Friedman has described an i n d i v i d u a l ' s i n -come as being determined by two s p e c i f i c sets of influences: the permanent component and the t r a n s i t o r y component. The f i r s t includes f a c t o r s common over a period of time, as t r a i n i n g , a b i l i t y , p e r s o n a l i t y ; the l o c a t i o n , type, and organization of the man's business; and accidental i n f l u -ences whose e f f e c t s are present throughout the time period. The t r a n s i t o r y component i s comprised of fa c t o r s e f f e c t i n g only a p o r t i o n of the period of time under consideration. These can be "chance" occurances or even fundamental f l u c t u a t i o n s i n the business cycle i t s e l f . The magnitude of the two components depends upon the p a r t i c u l a r period covered. Factors that appear permanent f o r one time period may not be so f o r another set of years. However, there i s no way of i s o l a t i n g the permanent and t r a n s i t o r y components of the income of a p a r t i c u l a r man. I t i s believed that the t r a n s i t o r y component i s of greater importance to the 3. I b i d . 4. Milton Friedman, S. Kuznets, Income from Independent  P r o f e s s i o n a l P r a c t i c e (New York: National Bureau of Economic Research, 1954)* P- 325. income status of some professions than others. I t appears that the l e v e l of the t r a n s i t o r y component would have a great deal of influence over the amount of the i n d i v i d u a l ' s d i s c r e t i o n a r y expenditures ... those which he need not make and may postpone. The permanent component would seem to e f f e c t decisions concerning purchases on c r e d i t as t h i s f a c t o r of income would be r e l i e d upon to meet the p e r i o d i c payments. Katona: Of the three recognized sectors of the economy ... business, government and the consumer ... only the former two have been considered to exert an autonomous influence on economic developments. The business sector has been capable of doing so by the a b i l i t y to r a i s e or lower the volume of business investment and the government sector through the exercise of f i s c a l p o l i c y . The consumer sector, however, as i t has been compelled to spend what i t derived from the other two sectors at a f a i r l y stable r a t e , has been observed to take a minor r o l e i n i n f l u e n c i n g economic a f f a i r s . The above body of economic thought was developed f o r the most part well before the Second World War. The structure of the socio-economic western world since World War II has changed quite r a d i c a l l y , however, having cor-responding changes i n present day economic actions. The names given to t h i s new society or economic system have varied: Galbraith labeled i t the A f f l u e n t Society, but, George Katona may have been even more accurate i n h i s designation ... the Mass Consumption Society. Economic cycles have gone from a l t e r n a t i n g periods of prosperity and depression to shorter-run f l u c t u a t i o n s of i n f l a t i o n and recession. There has also been the continuing ex-pansion of the middle c l a s s . The s i t u a t i o n i s one now of an a f f l u e n t majority and the deep-rooted poor. Katona has repeatedly made evident that "What i s relevant (to present day economics) i s that m i l l i o n s of f a m i l i e s now have 'supernumerary incomes'. They are i n a p o s i t i o n to spend money on things other than n e c e s s i t i e s . I f they choose they can increase or decrease t h e i r rate of spend-5 mg."^ Indeed, the lower the income the more d i f f i c u l t i t i s to accumulate any surplus, as v i r t u a l l y a l l income must be spent on absolute n e c e s s i t i e s i n order to l i v e accord-ing to a minimum of current standards. Because of i n -creased affluence, however, most consumers today need not spend t h e i r incomes at a steady rate and therefore the l e v e l of t h e i r incomes i n absolute terms i s not the sole deter-mining f a c t o r of economic developments. The marginal pressure of the l e v e l of d i s c r e t i o n a r y or postponable pur-chases made throughout the economy must also be given con-s i d e r a t i o n . Several f a c t o r s have contributed h e a v i l y to the 5. Katona, l o c . c i t . , p. 11. economic power.shift to consumer authority. One has been the increased a v a i l a b i l i t y and acceptance of c r e d i t buying. This has lead to the r e a l i z a t i o n that consumers can have things now which t h e i r parents would have had to have foregone. They are, therefore, capable of spending more i n a given period or year than t h e i r current income or savings. This use of c r e d i t i s p a r t l y encouraged by con-sumers' b e l i e f i n the continuance of t h e i r present income. However, the increased usage of c r e d i t has been also pro-moted by the tendency towards o r i e n t a t i o n to the present i n the l i f e s t y l e of the western s o c i e t i e s . There i s l e s s i n t e r e s t i n the proper use of c r e d i t or i n i t s long-term implications than i n a s u f f i c i e n t l y low p e r i o d i c payment r a t e . The o v e r a l l t o t a l costs incurred by purchases on c r e d i t are of secondary importance to the a v a i l a b i l i t y of the immediate use of the goods. The luxury of possessing many durable or non-perish-able goods has also come to be accepted and desired. Thus, the consumer's a b i l i t y to postpone purchases of t h i s type has also increased, as the d u r a b i l i t y of the goods transcends several periods and they do not require r a p i d replacement. 6. This i s not to imply that the d u r a b i l i t y of goods has increased. It i s contended, rather, that most durable goods purchased today are not made out of the necessity to replace a hopelessly broken-down possession. Therefore the purchase may be postponed f o r a period of, perhaps, a few months or u n t i l such time as the consumer f e e l s he i s (1) paying a more s a t i s f a c t o r y p r i c e , (2) has given up hope of obtaining a more reasonable p r i c e i n the near future, or, (3) u n t i l h i s desire to own the goods has overcome h i s resistance to the p r i c e l e v e l . "When a so c i e t y spends a l l i t s income on perishable goods .... and on services covering short periods .... i t s d i s -c r e t i o n i n postponing purchases or i n buying i n advance 7 of immediate needs i s severely l i m i t e d . " C e r t a i n l y the e f f e c t of unions has been f e l t . Vast numbers of middle class f a m i l i e s are now guaranteed con-s i s t e n t l y increasing benefits and wages that w i l l help to keep pace with a r i s i n g cost of l i v i n g . In t h i s same way, people have become educated to l i f e i n an i n f l a t i o n a r y economy. One of the truths of such an economic structure i s that a f t e r a period of i n f l a t i o n a r y increase has set i n there i s l i t t l e point i n buying i n advance of immediate needs. It generally reduces to a v i c i o u s c i r c l e i n which l i t t l e i f any savings can be made. The exception may be i n the case of large or d i s c r e t i o n a r y purchases. Here the i n d i v i d u a l psychology w i l l be of deciding importance. Economic pes-simism or the i n a b i l i t y to postpone the f u l f i l m e n t of a de-s i r e may contribute to not delaying the expenditure. This may be r e l a t e d to an increase i n c r e d i t buying. However, there are also i n d i v i d u a l s who are o p t i m i s t i c about the economic outlook or who are able to temporarily table t h e i r purchasing d e s i r e s . These w i l l be most l i k e l y to postpone t h e i r d i s c r e t i o n a r y purchases. 7. George Katona, The Mass Consumption Society (New York: McGraw H i l l Book Company, Inc., 1964;, p. 13. Another important economic development which has mitigated the t r a d i t i o n a l economic scene has been the mass acceptance of the t e l e v i s i o n which has had a great influence on the s o c i a l and economic i n t e l l i g e n c e of the consumer. I t has v i s u a l l y educated him to the long-run and day-to-day na t i o n a l changes which e f f e c t h i s personal l i f e . Despite the f a c t that the consumer i s informed more than ever before i t i s not to be assumed that he i s as sophisticated as he i s educated. There i s an apparent confusion over gust how the i n d i v i d u a l i n t e r p r e t s the i n -formation he receives. S o c i a l l y there have been many changes which have eff e c t e d l i f e i n the post-World War I I era, not the l e a s t of which has been the increased drive to a t t a i n material rewards. The "American Dream" has i t s a p p l i c a t i o n i n a l l a f f l u e n t s o c i e t i e s where people have r a p i d l y become aware of t h e i r a b i l i t y to have a better, more enjoyable l i f e . Government rec o g n i t i o n of methods through which to avoid depressions and b a t t l e i n f l a t i o n coupled with the union guarantees of improving standards of l i v i n g have sponsored the increase of human a s p i r a t i o n l e v e l s . The action taken to s a t i s f y these a s p i r a t i o n s , whether b e n e f i c i a l or des-t r u c t i v e to the system i n the long-run, have concrete and d i s c r e t i o n a r y forms. Wives frequently have returned to work, or husbands have taken second gobs. There has arisen the determination to possess rewards which p r i o r to World War I I were considered to be mutually exclusive, such as both motherhood and careers f o r women, or, with the en-trenchment of the Cold War, both guns and butter f o r the society as a whole. The aggregate r e s u l t of these many changes and forces has been the evolution of d i s c r e t i o n a r y spending as the consumers' economic l e v e r . These expenditures are not immediately necessary nor are they h a b i t u a l . They are timed according to the consumer's psychological economic outlook. However, the theory of the investment m u l t i p l i e r points out that an "upward s h i f t of consumption ( i . e . , a general increase i n the propensity to consume) w i l l r a i s e Q income by a magnified amount ..." For the economy as a whole i t i s evidently the marginal e f f e c t that i s important and i n f l u e n t i a l . R e l a t i v e l y small changes i n d i s c r e t i o n a r y consumption may make the difference between an upturn and a downturn. In the ea r l y 1900's Albert A f t a l i o n stated that he believed that the cause of f l u c t u a t i o n s i n the rate of investment must be looked f o r i n the dynamics of consumer 9 wants. I f the ultimate end of a l l production i s con-sumption then the f l u c t u a t i o n i n the demand f o r c a p i t a l goods must be explained i n terms of f a c t o r s operating on the wants of consumers and the demand to which such wants give r i s e . 8. Hansen, c_. c i t . , p. 1?1. A l f r e d Marshall also gave notice to expectations and wants by s t a t i n g that economic problems had t h e i r roots i n the minds of businessmen and as t h e i r expectations ran so turned the economy."*"^ Today i t i s possible that these theories of wants and expectations are s t i l l v a l i d as applied to the consumer. His a b i l i t y to postpone or accelerate h i s d i s c r e t i o n a r y expenditures i s d i r e c t e d u l t i m a t e l y by his w i l l i n g n e s s to spend and such willingness w i l l be predicated upon h i s personal a t t i t u d e s toward the short-run future economic trends."'""'" The economic influence of the consumers' decisions with regard to d i s c r e t i o n a r y expenditurrs should e f f e c t almost a l l sectors of the economy. Assuming t h i s , i t i s l o g i c a l that consumer expectations or mood should have a r e f l e c t i o n on the s e c u r i t i e s p r i c e a c t i o n i n the stock market. I t must yet be determined to what extent the 10. I b i d . , p. 273. 11. A vast amount of stock i s c o n t r o l l e d by i n s t i t u t i o n s whose investment decisions are based on future p r o f i t p i c t u r e s . As p u b l i c consumption increases so do p r o f i t s and, f u r t h e r , so should stock p r i c e s . In t h i s case the consumer should be i n c l i n e d to both spend and i n v e s t . As p r i c e s r i s e people may not n e c e s s a r i l y buy i n advance of expected increases (see footnote #6, t h i s chapter). The amount of t h e i r purchases cannot be played o f f against i n -vestment decisions because stock holdings are imperfectly d i s t r i b u t e d throughout the s o c i e t y . Therefore, the e n t i r e population may influence the stock market through economic actions but w i l l not balance out purchases against i n -vestments. e f f e c t e x i s t s . Hypothetically, i t would appear to be of a short-run lead nature by v i r t u e of the consumer opinion data used. While George Katona has done extensive work with the American consumer, a good Canadian f a c s i m i l e i s repres-ented by the F i n a n c i a l Post's quarterly Survey of Consumer 12 Buying Intentions. The percentage of favorable responses to the key question, "Do you think that r i g h t now i s a good time or a bad time f o r the average person to make a major outlay f o r such things as a home or car or some other major item?", have been used to generate an Index of Consumer Mood, base: 3rd quarter i960 = 100. By the use of the quarterly change i n t h i s Index, along with the measurement of several other s p e c i f i e d f a c t o r s , the author hopes to be able to judge whether there i s any appreciable e f f e c t of the change i n consumer mood on stock market p r i c e l e v e l s . Katona has noted that, "Changes i n consumer atti t u d e s are advance i n d i c a t o r s of changes i n consumer spending on durable goods and make a net c o n t r i b u t i o n to the p r e d i c t i o n of such spending." 1^ I t i s possible then that these same changes i n consumer att i t u d e s might foreshadow a change i n the l e v e l of stock p r i c e s or i n the l e v e l of the p r i c e s of stocks associated 12. F i n a n c i a l Post, Survey of Consumer Buying Intentions, September 1970, see Appendix. 13. Katona, The Powerful Consumer, op. c i t . , p. 53. with the durable goods i n d u s t r i e s . I t i s hoped that the r e s u l t s of t h i s analysis w i l l y i e l d a j u s t i f i c a t i o n f o r the use of an index of consumer mood or buying intentions to gauge or p r e d i c t the l e v e l of change i n the s e c u r i t i e s market. I f t h i s can be done i t w i l l then have been established that con-sumer decisions as to d i s c r e t i o n a r y expenditures have an economic e f f e c t on the area of s e c u r i t y p r i c e s . DATA AND STATISTICAL TESTS PERFORMED In t h i s chapter the methods of data c o l l e c t i o n are described as well as the s t a t i s t i c a l t e s t s performed. A more d e t a i l e d i n t e r p r e t a t i o n and analysis of r e s u l t s follows i n Chapter IV. The gauge of consumer mood employed was that repres-ented by the F i n a n c i a l Post Survey of Consumer Buying  Intentions with p a r t i c u l a r reference to Question 13B. This question asked, "Do you think that r i g h t now i s a good time or a bad time f o r the average person to make a major purchase, such as f o r a car or a house, or some other major item?" The purpose of t h i s survey was to examine the at t i t u d e s of a c r o s s - s e c t i o n of the Canadian population towards the current economic state of the country and to gather information on t h e i r buying intentions over the subsequent s i x month period. The survey was conducted as part of the regular quarterly Omnibus of Contemporary Research Centre, Ltd. This consists of a sample of 2,120 interviews, designed to be proportionate to major population c h a r a c t e r i s t i c s such as age, sex, d i s t r i b u t i o n by c i t y size and region. The service i s designed to provide a f l e x i b l e a c t i v -i t y where large samples may be accumulated over a period of months, or small sub-samples may be used according to spec-i f i c c l i e n t needs. In September, 1970, interviews were conducted i n every second household, on the topic of buy-ing i n t e n t i o n s . Thus, 1,060 household were interviewed on t h i s subject. TABLE I CHARACTERISTICS OF THE SAMPLE Total No. Pet. A l l Respondents 1061 100# Region: Maritimes Quebec Ontario P r a i r i e s B r i t i s h Columbia 9.5 28.7 34.8 17.3 9.7 Age of Respondents: 15 to 19 years 20 to 34 years 35 to 44 years 45 to 54- years Over 5^- years No answer 8.9 32.1 19.9 I6.7 20.9 1.5 Socio-Economic Status: Upper and upper middle Lower middle Lower 26.5 64.9 8.6 Occupation of Head of Household: Business and p r o f e s s i o n a l Sales and c l e r i c a l Service S k i l l e d and u n s k i l l e d labour, Farmers Housewives and students Retired and unemployed 12.4 15.1 11.1 36.7 5.9 5.9 12.9 can be taken i n the exploration of the impact of consumer confidence upon the s e c u r i t i e s market. The f i r s t being to determine the index of only those i n d i v i d u a l s who purchase s e c u r i t i e s and analyze the e f f e c t of t h e i r confidence l e v e l s upon the market. However, the att i t u d e s of these people are not a matter of t h e i r independent l i v e s . They must also be aware of the economy as a whole, a structure which r e f l e c t s the a t t i t u d e s of many other i n d i v i d u a l s who do not d i r e c t l y p a r t i c i p a t e i n the market. Further, a vast amount of stock i s under the co n t r o l of i n s t i t u t i o n s , not i n d i v i d u a l s , which are s e n s i t i v e to the reactions of the enti r e economy. Thus, a second approach, the one pursued by t h i s author, i s to te s t the e f f e c t on the stock market made by the economic psychology prevalent throughout the society, not that of one s t r a t i f i e d group. In the s t a t i s t i c a l t e s t s applied the degree of 1 c o r r e l a t i o n between the Index of Consumer Mood and the 2 DBS Investors Index was measured. Correlations of other v a r i a b l e s ( i n c l u d i n g long-term Canadian Government bond i n t e r e s t r a t e s , corporate earnings before tax, money supply 1. The Index of Consumer Mood was based upon the 3rd quarter of I960 = 100. - The s t a t i s t i c a l t e s t s presented here cover 38 quarters, from 3rd quarter i960 to 4-th quarter 1969. The Index and Questionnaire•were avai l a b l e through the cooperation of Mr. R. G. Scott, Manager, Maclean-Hunter Research Bureau. 2. The DBS Index of Common Stock P r i c e s , Investor's Index of Total Stocks was employed. The base was 1956 = 100. and GNP) to trie DBS Index were also investigated i n the course of t e s t i n g several models. Multiple regressions employing the ordinary l e a s t squares technique were run on the models, i n which s e c u r i t y p r i c e was always taken as the dependent v a r i a b l e . Further, c a l c u l a t i o n s were made of the estimates of the polynomial d i s t r i b u t e d l a g s . A l l the evaluations, c a l c u l a t i o n s and p l o t s were performed through the use of the Time Series Processor program f o r computer use. Model I: Several models and combinations of models were developed. F i r s t designed was a simple system of v a r i a b l e s , several of which were based purely on f i r s t d i f f erences i n the index values and raw data. B r i e f l y , s e c u r i t y p r i c e was taken to be a function of the change i n consumer mood, corporate earnings before tax, long-term Canadian Govern-ment bond i n t e r e s t rates and some random f a c t o r : P i = + B + C + X). For the c a l c u l a t i o n s of the poly-nomial d i s t r i b u t e d lags i n t h i s model, consumer mood was lagged s i x periods. Here i t was expected that consumer mood would demonstrate a p o s i t i v e r e l a t i o n s h i p to se c u r i t y p r i c e . I t was hypothesized that s e c u r i t y p r i c e would move i n s i m i l a r correspondence to at t i t u d e s governing the size and timing of investments because of t h e i r influence on the market. The force of t h i s influence was taken to be approximately a s i x month lead i n d i c a t i o n of s e c u r i t y p r i c e l e v e l . When one rose the other should reasonably be seen to follow s u i t and v i s a versa. Corporate earn-ings before tax were judged to also be p o s i t i v e i n r e -l a t i o n to s e c u r i t y p r i c e l e v e l s . Long-term Canadian Gov-ernment bond i n t e r e s t rates, however, were expected to show a negative c o r r e l a t i o n as, t r a d i t i o n a l l y , a t t r a c t i v e bond i n t e r e s t rates have been avail a b l e during periods when good returns were not r e a d i l y obtainable from other c a p i t a l market instruments. Thus: SPA = ACMI + CEBT +_ BIR + X SPA = Security p r i c e ACMI = Change i n Consumer Mood Index l e v e l CEBT = Corporate earnings before tax BIR = Long-term bond i n t e r e s t rates X = Random f a c t o r 3. I t i s a recognized p o s s i b i l i t y that there may be a l e s s e r l a g between consumer mood and the stock market since i t i s known that the stock market leads the economy. As-a change i n consumer mood i s necessary to bring about a change i n the economy, i t can be expected to have the same r e l a t i o n to the•stock market. The lead of consumer mood to stocks would, therefore be shorter than to the economy. 4. The McLeod, Young Weir & Co., Ltd., 4-0 Bond Y i e l d  Average was k i n d l y provided f o r use here by Mr. Ken Harris of that f i r m . The i n t e r e s t rates used were those f o r Canada long-term bonds and, i n i960 only, the rates on long-term Dominion bonds. Replacement was made f o r the f a c t o r s of GNP and Money Supply i n a l t e r n a t i v e e f f o r t s to achieve a better explanation of the s e c u r i t y p r i c e l e v e l s represented by the data. The change i n GNP as an i n d i c a t o r of the l e v e l of the n a t i o n a l economy was expected to be s i m i l a r l y r e -l a t e d to the l e v e l of s e c u r i t y p r i c e . Further, since t i g h t e r r e s t r i c t i o n s are applied to money supply during economically unfavorable times, s e c u r i t y p r i c e was reasoned to be p o s i t i v e i n atti t u d e toward that v a r i a b l e as w e l l . SPA = ACMI + AGNP + X and SPA = 4CMI + AMONS + X A GNP = Change i n l e v e l of Gross National Product AMONS = Change i n l e v e l of money supply Model l i t The second model considered P i = ^ ( A + B + C + X) i n which a l l v a r i a b l e s employed r e l a t i v e d i f f e r e n c e s . Money supply was lagged eight periods i n the polynomial d i s t r i b u t e d l a g c a l c u l a t i o n s . This l a g would t e s t the lead e f f e c t of the v a r i a b l e on se c u r i t y p r i c e l e v e l s several months hence. I t was expected to produce a p o s i t i v e 5. Money supply was accepted as being the Total Currency Outside Banks and the Total Chartered Bank Deposits, i n -cluding Personal Savings Deposits, Government of Canada Deposits and Other Deposits. This information was a v a i l -able f o r a l l necessary years from the Bank of Canada S t a t i s t i c a l Summary. r e l a t i o n s h i p to s e c u r i t y p r i c e and to demonstrate a lead i n d i c a t i o n of future p r i c e l e v e l s . The use of r e l a t i v e differences helped reduce the di s t o r t i o n s of the i n d i v i d u a l v a r i a b l e s and presented them i n more r e a l i s t i c magnitudes than those based s o l e l y upon f i r s t d i f f e r e n c e s . Corporate earnings had long been be-li e v e d to act as one of the prime d i c t a t o r s of the l e v e l of s e c u r i t y p r i c e s . I t was expected to function heavily i n the degree of accuracy with which the v a r i a b l e s des-cribed the actual data. The c o r r e l a t i o n s were set up as follows f o r program-ming: SPAX = CMX + CEBX + BIRX + X and SPAX = CMX * CEBX * GNPX * X and SPAX = CMX + CEBX + MONX + X SPAX = (SPA (-2) - SPA (-2)) / SPA (-2) CMX = (CMI (-1) - CMI (-2)) / CMI (-2) CEBX = (CEBT (-1) - CEBT (-2)) / CEBT (-2) BIRX = (BIR (-1) - BIR (-2)) / BIR (-2) GNPX = (GNP (-1) - GNP (-2)) / GNP (-2) MONX = (MONS (-1) - MONS (-2)) / MONS (-2) Model I I I : The t h i r d model was based upon the actual data and index l e v e l s involved. Corporate earnings before tax and money supply were both deflated by the Consumer Price Index.^ The va r i a b l e s were deflated i n an e f f o r t to r e -duce the data from nominal values to r e a l values. Thus, corporate earning before tax and money supply were ex-pected to reveal an even stronger p o s i t i v e c o r r e l a t i o n to s e c u r i t y p r i c e . The other v a r i a b l e s , except long-term bond i n t e r e s t rates, were also to remain p o s i t i v e as previously hypothesized. The consumer mood index was again lagged over s i x periods i n the polynomial d i s t r i b u t e d l a g c a l c u l a t i o n s . Better l a g r e s u l t s were hoped f o r i n t h i s model because actual data and index l e v e l s were used as opposed to the magnitudes of change between these l e v e l s . SPA = CMI + CEBD + BIR + X SPA = CMI + CEBD + GNP + X SPA = CMI + CEBD + MOND + X CEBD = CEBT •/• CPI MOND = MONS / CPI CPI = Consumer P r i c e Index Model IV: The fourth model incorporated the most s i g n i f i c a n t features of the three previous models to produce a better r e l a t i o n s h i p between stock p r i c e s and the v a r i a b l e s under 6. A l l Consumer Pr i c e Index fi g u r e s were converted to the base 194-9 = 100, which was i n e f f e c t p r i o r to 1967. consideration. Correlations i n v e s t i g a t e d were: SPA = CMX + CEBD + BIR + X SPA = CMX + CEBD + A GNP + X SPA = CMX + CEBD + MOND + X A l l d e f i n i t i o n s are as previously noted. Model V: A f i n a l model was constructed which omitted the Consumer Mood Index v a r i a b l e . In t h i s way i t was possible to judge the extent of error and difference a t t r i b u t a b l e to t h i s p a r t i c u l a r v a r i a b l e . CHAPTER IV STATISTICAL TEST RESULTS AND ANALYSIS A time ser i e s has been c l a s s i f i e d as containing four elements: a trend, plus c y c l i c a l , seasonal and random f l u c t u a t i o n s . In these t e s t s the majority of data used has been seasonally adjusted, thus eliminating much of the problem of seasonal v a r i a t i o n . The r e s u l t s of the multiple c o r r e l a t i o n s thus con-t a i n the e f f e c t s of the influence of trend, c y c l i c a l var-i a t i o n and random in f l u e n c e . However, the c o r r e l a t i o n of consumer mood to stock p r i c e was c o n s i s t e n t l y so poor that the combined influence of the three remaining elements of a time ser i e s i s not alone s u f f i c i e n t to explain i t . Attention must be given to the o r i g i n a l hypothesis and p a r t i c u l a r l y to the data used. Analysis of these points follows i n Chapter V. In the course of the several c a l c u l a t i o n s f o r the t e s t s , one type of magnitude was compared f o r c o r r e l a t i o n with another. In most instances the substance of the various datum wereabased on very d i f f e r e n t grounds. How-ever, the bases of the datum are not of paramount import-ance, only a p o s i t i v e , s t a t i s t i c a l l y recognisable re-l a t i o n s h i p i s required or d e s i r a b l e . Test I: The f i r s t t e s t , containing f i r s t d i f f erences f o r the Consumer Mood Index, GNP, and Money Supply v a r i a b l e s , appeared to produce no relevant c o r r e l a t i o n whatsoever between s e c u r i t y p r i c e l e v e l s and consumer attitudes about the economy. There i s even, i l l o g i c a l l y enough, the hint of a s l i g h t l y negative c o r r e l a t i o n i n respect to a l l the var i a b l e s introduced with the exception of GNP where a vaguely p o s i t i v e r e l a t i o n s h i p i s reported. The strongest c o r r e l a t i o n e x i s t s between corporate earnings and se c u r i t y p r i c e s where a 0.9418 was re g i s t e r e d . TABLE I I RESULTS TEST #1 Replacement Variables Correlations BIR CMI CEBT BIR SPA 1.000 -0.1545 1.000 -0.1477 0.7976 1.000 -0.0570 0.9418 0.7189 1.000 GNP CMI CEBT GNP SPA 1.000 -0.1343 1.000 0.1214 0.6296 1.000 -0.0570 0.9418 0.6162 1.000 MONS CMI CEBT MONS SPA 1.000 -0.3143 1.000 -0.1877 0.5473 1.000 -0.0570 0.9418 0.5381 1.000 In general a l l regressions, c o r r e l a t i o n s and poly-nomial d i s t r i b u t e d lags provided u n s a t i s f a c t o r y r e s u l t s when cal c u l a t e d i n connection with Test #1. The only r e -s u l t s of s i g n i f i c a n c e were testimony to the already accepted b e l i e f that there i s a strong t i e between corporate earn-ings and sec u r i t y p r i c e s , and that GNP and money supply l e v e l s are also i n f l u e n t i a l . Test I I : In an e f f o r t to produce a c l e a r e r p i c t u r e , Test #2 was conducted i n which the r e l a t i v e differences of a l l v a r i a b l e s were considered under the same c o r r e l a t i o n and multiple regression c a l c u l a t i o n s . Here one finds the cor-r e l a t i o n s on the whole to be l e s s appealing than before. However, i n t h i s examination the c o r r e l a t i o n between Con-sumer Mood and Security Price was the most p o s i t i v e of that reported i n a l l t e s t s between these two v a r i a b l e s . TABLE I I I RESULTS TEST #2 Replacement Variables Correlations BIRX CMX CEBX BIRX SPAX 1.000 -0.1110 -0.1736 0.5283 1.000 -0.0399 0.1886 1.000 -0.3386 1.000 GNPX CMX CEBX GNPX SPAX 1.000 -0.1110 0.1299 0.5283 1.000 0.1431 0.1886 1.000 -0.0714 1.000 MONX CMX CEBX MONX SPAX 1.000 -0.1110 -0.3350 0.5283 1.000 0.1988 0.1886 1.000 0.0169 1.000 In considering the r e s u l t s of the multiple r e -gressions c a r r i e d out, i t was r e a l i z e d that the c o e f f i c -2 i e n t of determination, R , represented how well the var-i a b l e s explained the v a r i a t i o n i n the s e c u r i t y p r i c e data around i t s mean. In each case i n Test #2 where Security Price was considered as the dependent v a r i a b l e and Con-sumer Mood, Corporate Earnings Before Tax, Long-Term Bond Interest Rates, or GNP or M O n e y Supply, comprised the i n -2 dependent v a r i a b l e s , the R was c h a r a c t e r i s t i c a l l y low, never exceeding 0.3937. When Consumer Mood, Corporate Earnings Before Tax and Long-Term Bond Interest Rates were plugged into the regression equation, Corporate Earnings showed the highest estimated c o e f f i c i e n t at 0.25567 (See Regression Test Results i n Appendix I I ) . The standard errors were r e l a t i v e l y low f o r a l l three v a r i a b l e s i n t h i s model, the greatest of which was associated with Consumer Mood, 0.38531. The t - s t a t i s t i c s were lo\v f o r a l l components. As a whole t h i s model was considered to explain Sec-u r i t y P r i c e quite poorly as only 39.67$ of the variance i n Security P r i c e could be accounted f o r by the variance i n the equation (R 2 = 0.3967). The P - s t a t i s t i c of 7.4-529 ind i c a t e d that findings were s i g n i f i c a n t enough to show that they were not produced by a chance occurance. The standard error of the regression was low at 0.04-353 meaning that the actual values were not scattered too widely about the regression l i n e . E v i d e n t l y the v a r i a b l e s ex-plained e f f i c i e n t l y the 4-0$ of the variance which they accounted f o r but were not s u f f i c i e n t to give a true p i c t u r e of the dependent v a r i a b l e . As can be seen by the Table of Regression Test Results i n Appendix I I the other two regression models i n Test #2 provided correspondingly u n s a t i s f a c t o r y r e s u l t s . Continually, the i n d i v i d u a l v a r i a b l e s were i n e f f e c t i v e i n describing Security P r i c e . Money Supply, based upon r e l -a t ive d ifferences i n t h i s t e s t , demonstrated a high estim-ated c o e f f i c i e n t i n t h i s t e s t (0.60899) but had unfavor-able measurements of standard error (0.50201) and s i g n i f -icance based on the t - s t a t i s t i c (0.12131). The two equations were again e f f i c i e n t i n p r e d i c t i n g that p o r t i o n of the Secu r i t y Price f o r which they could account (approximately 37$) but the quantity of v a r i a b l e s was i n s u f f i c i e n t to explain the whole of the variance of the dependent component. The P - s t a t i s t i c remained at about the same l e v e l throughout, i n d i c a t i n g that the equations were s u f f i c i e n t l y s i g n i f i c a n t not to have been occurrances of a random nature. Test I I I : Continuing to Test #3, where deflated values f o r Corporate Earnings Before Tax and Money Supply were i n t r o -duced, the c o r r e l a t i o n s f e l l i nto a much more reasonable perspective regarding the r e l a t i o n s h i p between Security P r i c e and a l l v a r i a b l e s except Consumer Mood. TABLE IV RESULTS TEST #3 Replacement Variables Correlations BIR CMI CEBD BIR SPA I . 000 -0.0086 1.000 -0.6108 0.6160 1.000 -0.0891 0.9131 0.7189 1.000 GNP CMI CEBD GNP SPA 1.000 -0.0086 1.000 -0.4-256 0.8190 1.000 -0.0891 0.9131 0.8901 1.000 MOND CMI CEBD MOND SPA 1.000 -0.0086 1.000 -0.4-34-9 0.8263 1.000 -0.0891 0.9131 0.8963 1.000 Here again i t i s reassuring to f i n d support f o r the f i x e d r e l a t i o n s h i p between Security Price and Corporate Earnings. Money Supply appears most i n f l u e n t i a l here as well, and also records a d i s t i n c t t i e to Corporate Earnings, which i s only s l i g h t l y greater than that represented by GNP. Unfortunately, the s t a t i s t i c s are not so s a t i s f y i n g with regard to Consumer Mood which lapsed into a p o s i t i o n of v i r t u a l l y zero or even negative c o r r e l a t i o n i n r e l a t i o n to a l l the v a r i a b l e s concerned. Consumer att i t u d e s toward the prevelant economic conditions would appear to have no af f e c t at a l l on Corporate Earnings. Further, the people's psychological viewpoints would seem to run i n a f a i r l y negative d i r e c t i o n to the movements of the i n t e r e s t rates on long-term government bonds. This i s the one aspect which seems to be j u s t i f i a b l e , assuming that consumer economic attitudes do have the a b i l i t y to influence the degree of economic a c t i v i t y of a nation, one would suspect an inverse r e l a t i o n s h i p . In other words, a favorable consumer outlook, being i n d i c a t i v e of prosperous or en-couraging times, would correspond to lower bond i n t e r e s t r a t e s . P l o t s of multiple regressions and polynomial d i s -t r i b u t e d lags described more stable patterns than before and the proximity between actual and f i t t e d values was 2 much c l o s e r . The R values f o r the runs i n c l u d i n g Bond Interest Rates, GNP and deflated Money Supply were respect-i v e l y 0.8856, 0.9164- and 0.9258 (as shown i n Regression Test Results i n Appendix I I ) . The F - s t a t i s t i c , which was low throughout Tests 1 and 2, now approached more desirable l e v e l s i n the l e a s t squares regressions. S i g n i f i c a n c e i s indicated by t h i s c a l c u l a t i o n which increases absolutely with the v a l i d i t y of the c o r r e l a t i o n . In the equation which included deflated Money Supply the F s t a t i s t i c was recorded at ju s t higher than 141.374. I t s standard error associated with i t s estimated c o e f f i c i e n t was low at 0.15287 and the t - s t a t i s t i c was a sound 0.62566. Ove r a l l , t h i s model of the three best described the p variance of Security P r i c e i n Test #3. The R ind i c a t e d a 92.58$ explanation of variance. The standard error, the lowest of the three equations was s t i l l high at 7.6643. I t appears, then, that the actual values f e l l rather widely around the f i t t e d regression l i n e . The v a r i a b l e s of Consumer Mood, deflated Corporate Earnings and de-f l a t e d Money Supply together seem to account f o r a large part of the variance of Security P r i c e but don't do so with much e f f i c i e n c y . The f i t could have been b e t t e r i f some other v a r i a b l e ( s ) or combination thereof had been used. However, i t i s evident that deflated Money Supply i s s i g n i f i c a n t l y important i n i t s e l f as a p r e d i c t o r of Security Price l e v e l s . I t appeared that when the a c t i v i t y of Security P r i c e was explained by the va r i a b l e of deflated Money Supply the estimated c o e f f i c i e n t of the regression was greater than 0.9564, the highest of a l l v a r i a b l e s under consideration. Deflated Corporate Earnings Before Tax also evidenced a high c o e f f i c i e n t of 0.7456, although i t s standard error was greater and i t s t - s t a t i s t i c lower than those of de-f l a t e d Money Supply. Test IV: Test #4 represented a hopeful combination of a l l the v a r i a t i o n s on the o r i g i n a l v a r i a b l e s which had performed most s i g n i f i c a n t l y i n the f i r s t three t e s t s . Consumer Mood was based on r e l a t i v e d i f ferences i n the data but Security P r i c e was l e f t at the actual index l e v e l s . In the second regression model of t h i s t e s t Consumer Mood was reported as having accounted f o r 63.66$ of the variance i n Security P r i c e , but d i d so quite i n e f f i c i e n t l y (standard error was 0.9999). While deflated Corporate Earnings described a much smaller percentage more accurately. (See Regression Test Results i n Appendix I I ) . TABLE V RESULTS TEST #4-Replacement Variables Correlations BIR CMX CEBD BIR SPA 1.000 -0.0173 1.000 -0.1057 0.6160 1.000 0.0256 0.9131 0.7189 1.000 GNP CMX CEBD GNP SPA 1.000 -0.0173 1.000 -0.1338 0.6635 1.000 0.0256 0.9131 0.6162 1.000 MOND CMX CEBD MOND SPA 1.000 -0.0173 1.000 -0.0880 0.8263 1.000 0.0256 0.9131 0.9863 1.000 p The t h i r d equation showed the l a r g e s t R of 0.9028, the highest F s t a t i s t i c of 105.227 and the lowest standard error of 8.7726. This would again i n d i c a t e an u n r e l i a b l e job of describing a large amount of dependent v a r i a b l e variance. This would make one believe that at l e a s t one or more of the v a r i a b l e s could be replaced by some better p r e d i c t o r s . In t h i s ease the poorest performance was that of Consumer Mood with a low estimated c o e f f i c i e n t , high standard error and poor t - s t a t i s t i c . to those produced i n Test #3 hut the actual and f i t t e d values were s l i g h t l y l e s s well matched. The F s t a t i s t i c s 2 and the R readings were lower than i n the previous t e s t , however, the most s i g n i f i c a n t equation remained that which included deflated Money Supply. In one instance i n which the polynomial d i s t r i b u t e d l a g was run on an equation i n c l u d i n g Long-Term Bond In t e r -est Rates the independent v a r i a b l e of Consumer Mood recorded a high p o s i t i v e estimate of c o e f f i c i e n t i n r e l a t i o n to the dependent v a r i a b l e , Security P r i c e . However, i n the instance the standard error a t t r i b u t e d to the r e l a t i v e d i f f e r e n c e i n Consumer Mood was also i n o r d i n a t e l y high. The model as a whole f a i l e d to describe the data as well as the other two equations used i n the d i s t r i b u t e d lags. Therefore, the Consumer Mood r a t i n g produced here must not be considered as being p a r t i c u l a r l y r e l i a b l e . Test V: Test #5 was run on exactly the same data as was Test #4- but with the omittance of the Consumer Mood v a r i a b l e . A l l c o r r e l a t i o n s n a t u r a l l y remained the same and the r e -s u l t s of the regression and polynomial d i s t r i b u t e d l a g equations were not a l t e r e d to any s i g n i f i c a n t extent. How-ever, while the standard error of each equation changed very l i t t l e , there was i n each case a large increase i n the F s t a t i s t i c . Other measures of v a l i d i t y remained quite close to what they previously had been. The fa c t that the regression c o e f f i c i e n t s and standard errors remained so close to previous l e v e l s of Test #4 would seem to indi c a t e that the equation described the*variance i n Security Price about as well with the i n c l u s i o n of Consumer Mood as with i t s exclusion. The standard error could probably be im-proved by the replacement of Consumer Mood with a more e f f i c i e n t and accurate measure of Security P r i c e . The var i a b l e e s s e n t i a l l y appears to add or detract very l i t t l e from the performance of the models, except to s t r a i n the proof of the non-random or s i g n i f i c a n t f i t of the actual and contrived values. TABLE VI EFFECT OF REMOVAL OF CONSUMER MOOD VARIABLE Regression With: F S t a t i s t i c with CMX F S t a t i s t i c Without CMX BIR 81.155289 120.439163 GNP 57.725922 87.879181 MOND 105.227417 152.654541 Exclusion of the Consumer Mood v a r i a b l e caused the improvement of the F s t a t i s t i c measure of v a l i d i t y by up to 47 points. I t therefore appears that the i n c l u s i o n of t h i s p a r t i c u l a r v a r i a b l e explains to some extent the low degree of v a l i d i t y demonstrated by several of the t e s t s . CHAPTER V CONCLUSIONS The theory of how consumer mood was believed to a f f e c t stock market a c t i v i t y was described i n Chapter I I . Again, the theory b r i e f l y was that consumers were capable of a f f e c t i n g the economic scene by the control they exerted over the amount and timing of t h e i r own d i s c r e t i o n a r y ex-penditures. Assuming that the consumers' att i t u d e s e f f e c t the trade i n p u b l i c markets, i t appeared reasonably j u s t -i f i a b l e that they could equally well e f f e c t the trade on the stock market. Prom a l l f i n d i n g s , however, the hypothesis would seem to be groundless. No s i g n i f i c a n t c o r r e l a t i o n s a t t r i b u t a b l e to consumer index r a t i n g s , i n i s o l a t i o n or i n combination with other v a r i a b l e s , could be discovered e i t h e r p o s i t i v e l y or negatively. Prom a l l r e s u l t s i t i s c l e a r that money supply and corporate earnings before tax have a great bearing on the l e v e l of stock p r i c e s . The i n v e s t i g a t i o n s of B. W. Sprinkel have already acknowledged an^.expectation of t h i s c o r r e l -a t i o n so that the r e s u l t s were of a more assuring than 11 s u r p r i s i n g nature. 11. B. W. Sprinkel, Money and Stock Prices ( I l l i n o i s : Richard D. Irwin, Inc., 1964)~ Several considerations a f t e r the f a c t may be of some i n t e r e s t i n r e l a t i o n to the findings of the t e s t s con-ducted. I t i s possible that the Consumer Mood Index may be of considerably more s i g n i f i c a n c e when taken i n a s s o c i a t i o n with p a r t i c u l a r durable goods or r e t a i l i n g stocks as these areas are the most d i r e c t l y s e n s i t i v e to changes i n con-sumers' a t t i t u d e s . Further, i n the s t r i c t e s t sense, the r e s u l t s of the • s t a t i s t i c a l t e s t s i n d i c a t i n g v i r t u a l l y zero c o r r e l a t i o n s were made i n conjunction with only the responses to Question 13B of the Survey of Consumer Buying Intentions. Other studies have found i t necessary to combine t h i s question with several others i n order to determine consumer con-fidence. Attention should also l i k e l y be given to reactions to questions concerning consumers' outlooks on t h e i r f i n -a n c i a l s i t u a t i o n s and p o s s i b l y intentions on the buying of s p e c i f i c products. Further, studies by G. Katona have s p e c i f i c a l l y involved the use of questions r e l a t i n g d i r e c t l y to consumer atti t u d e s about the behavior of the stock market i t s e l f i n the near future. While t h i s paper lends no support to the tested hypo-t h e s i s , i t i s possible that what was explored did not a c t u a l l y e x i s t , i . e . , a genuine power of consumer mood over stock p r i c e s . Indeed, i t would appear to be an altogether spurious notion. However, i t may have been measured inadequately or i t may remain as an ominous but heretofore unorganized power of s o c i a l and economic potency. For instance, i t i s c l e a r that the v a s t l y improved and rapid communication system of t e l e v i s i o n has brought much more news and education to the general p u b l i c . This information, though, may not be s u f f i c i e n t l y understood or perceived and may r e s u l t i n confusion rather than enlightenment. I t should, however, be kept i n mind that a sizable p o r t i o n of corporate stock i s not i n the possession of private i n d i v i d u a l s . Further, due to the public s e n s i t i v i t y to the possib l e losses and the b e l i e f that money invested i n stock i s not always r e a d i l y a v a i l a b l e , as the time when i t i s needed may not be a good time to s e l l , many people who buy stock do so with only a small part of t h e i r savings f o r that purpose. The one r e s u l t remaining frmn the t e s t s which would seem to merit some further exploration would be the i n d i c -a t i o n of an inverse r e l a t i o n s h i p between consumer confidence and long-term bond i n t e r e s t rates which occurred i n the c o r r e l a t i o n s of Test #3. This could be of some p r e d i c t i v e value upon fu r t h e r refinement. In conclusion i t must be noted that the r e s u l t s evid-enced here are not to be accepted as conclusive but rather as representative of ground work to supply d i r e c t i o n f o r further study. Any g e n e r a l i z a t i o n of the lack of s t a t i s t i c a l support f o r a r e l a t i o n s h i p between consumer confidence and stock p r i c e s to the e f f e c t of consumer opinion upon the economy as a whole would neither be reasonable nor ' j u s t i f -i a b l e at t h i s point. .1. D i l l a r d , Dudley. The Economics of John Maynard Keynes, New York, P r e n t i c e - H a l l , Inc., 1948. 2. Friedman, Milton. Income from Independent Prof e s s i o n a l P r a c t i c e , New York,' National Bureau of Economic Research, 1945. 3. I n f l a t i o n : Causes and Consequences, Bombay, Asia Publishing House, 1963. 4. Hansen, A l v i n H. Business Cycles and National Income, New York, W. W. Norton & Company, Inc., 1951. 5. H a z l i t t , Henry. The C r i t i c s of Keynesian Economics, New York, D. Yon Nostrand Company, Inc., I960. 6. Katona, George. The Mass Consumption Society, New York, McGraw-Hill Book Company, Inc., 1964. 7. . The Powerful Consumer, New York, McGraw-Hill Book Company, Inc., I960. 8. . Psychological Analysis of Economic Behavior, New York, McGraw-Hill Book Company, Inc., 1963. 9. and Mueller, Eva. Consumer Expectations 1953-1956, Survey Research Center, I n s t i t u t e f o r S o c i a l Research, U n i v e r s i t y of Michigan. 10. and . Consumer Response to Income Increases, Washington, D.C., The Brooklings In-s t i t u t e , 1968. 11. , Strumpel, Burkhard and Zahn, Ernest. A s p i r -ations and Affluence, New York, McGraw-Hill Book Company, Inc., 1971. 12. Keynes, John Maynard. The End of Lais s e z - P a i r e , London The Hogarth Press, 13. K l e i n , Lawrence R. The Keynesian Revolution, New York, The MacMillan Company, 1954. 14. Spr i n k e l , B. W. Money and Stock P r i c e s , I l l i n o i s , Richard D. Irwin, Inc., 1964. APPENDIX I CORRELATION RESULTS PROM ALL TESTS Test No. Replacement Variable #1 BIR CMI J L . Correlations CEBT -0.1343 1.000 BIR -0.1477 0.7976 1.000 SPA -0.0570 0.9418 0.7189 1.000 GNP CMI CEBT GNP SPA 1.000 -0.1343 1.000 0.1214 0.6296 1.000 -0.0570 0.9418 0.6162 1.000 MONS CMI CEBT MONS SPA 1.000 -0.1343 -0.1877 -0.0570 1.000 0.5473 0.9418 1.000 0.5381 1.000 BIRX CMX CEBX BIRX SPAX 1.000 -0.1110 1.000 -0.1736 -0.0399 1.000 0.5283 0.1886 -0.3386 1.000 GNPX CMX CEBX GNPX SPAX 1.000 -0.110 1.000 0.1299 0.1431 1.000 0.5283 0.1886 -0.0714 1.000 MONX CMX CEBX MONX SPAX 1.000 -0.1110 1.000 -0.3350 0.1988 1.000 0.5283 0.1886 0.0169 1.000 Test No. Replacement Variable C o r r e l a t i o n #3 BIR - CMI CEBD BIR SPA 1.000 -0.0086 -0.6108 -0.0891 1.000 0.6160 0.9131 . •:. i.ooo 0.7189 1.000 GNP CMI CEBD GNP SPA 1.000 -0.0086 -0.4256 -0.0891 1.000 0.8190 0.9131 1.000 0.8901 1.000 MOND CMI CEBD MOND - SPA 1.000 -0.0086 -0.4349 -0.0891 1.000 0.8263 0.9131 1.000 0.8963 1.000 #4 BIR CMX CEBD BIR SPA 1.000 -0.0173 -0.1057 0.0256 1.000 0.6160 0.9131 1.000 0.7189 1.000 GNP CMX CEBD GNP SPA 1.000 -0.0173 -0.1338 0.0256 1.000 0.6635 0.9131 1.000 0.6162 1.000 MOND CMX CEBD MOND SPA 1.000 -0.0173 -0.0880 0.0256 1.000 0.8263 0.9131 1.000 0.8963 1.000 iAPPENDIX II REGRESSION TEST RESULTS: E 2 t s t a t i s t i c s Standard errors Estimated c o e f f i c i e n t s Ordinary Least Squares Dependent Variable SPA Independent Estimated Standard I n -variable C o e f f i c i e n t E r r o r S t a t i s t i c C 0.4-3617203E 02 0.10373552E ©2 0.42046537E 01 CMI 0.80607355E-01 0.67451477E-01 0.11950417E 01 CEBT 0.10872221E 00 0.98936334E-02 0.10989l08E:-02 " BIR -0.25676584E 01 0.29209604E 01 -0.87904590E 00 R-Squared = 0.8944 F - S t a t i s t i c ( 3, 34) = 95-999435 Standard E r r o r of the Regression = 9.141964 Ordinary Least Squares Dependent Variable SPA Independent Estimated Standard In-variable C o e f f i c i e n t E r r o r S t a t i s t i c C 0.37713699P 02 0.78793278E 01 0.47864103E 01 CMI 0.80739796E-01 0.70587933E-01 0.11438179E 01 CEBT 0.10072917E 00 0.80674477E-02 0.12485877E 02 GNP 0.66497829E-03 0.32279145E-02 0.20600861E 00 R-Squared = 0.8921 P - S t a t i s t i c ( 3, 34) - 93.745316 Standard E r r o r of the Regression = 9.239500 Ordinary Least Squares Dependent Variable SPA Independent Estimated Standard in-Variable C o e f f i c i e n t E r r o r S t a t i s t i c C 0.38998520E 02 0.7864-0556E 01 0.4-959084-5E 01 ' CMI 0.9084-9161E-01 0.68272650E-01 0.13306808E 01 CEBT 0 .99276721E-01 0.71678534-E-02 0.138-50272E 02 MONS 0.32500010E-02 0.4-9125529E-02 0.66157335E 00 R-Squared = 0.8934-E - S t a t i s t i c ( 3, 34-) = 94-.96524-0 Standard E r r o r of the Regression = 9.186329 Ordinary Least Squares Dependent Variable ... SPAX Independent Variable C CMX Estimated C o e f f i c i e n t 0.14-873218E-01 0.14-5034-3IE 00 Standard E r r o r 0.80318584-E-02 0.38531333E-01 T-S t a t i s t i c 0.185154 -72E 01 0.3764-0610E 01 CEBX 0 . 2 5 5 6 6 9 4 - 1 E 00 0.14-5504-83E 00 0 . 1 7 5 7 H 9 2 E 01 BIRX -0.3730614-8E 00 0.21050155E 00 -0.17722502E 01 R-Squared = 0.3967 F - S t a t i s t i c ( 3, 34-)' = 7.4-5294-8 Standard E r r o r of the Regression = 0.04-3532 -4-7-Ordinary Least Squares Dependent Variable SPAX Independent Estimated Standard In-variable C o e f f i c i e n t E r r o r S t a t i s t i c C 0.2759894-4E-01 0.15079830E-01 0.18301888E 01 ©MX 0.16509771E 0 0 0.39026387E -01 0 . 4-2304 - 1 1 5 E 01 CEBX 0.30363286E 0 0 0 . 1 4 - 9 8 0 1 7 3 E 0 0 0 . 2 0 2 6 8 9 7 4 - E 01 GNPX - 0 . 9 2 0 5 8 4 - 1 4 E 0 0 0.68084-621E 0 0 - 0 . 1 3 5 2 1 1 7 5 E 0 1 R^Squared = 0 . 3 7 4 - 6 P - S t a t i s t i c ( 3 , 3 4 - ) = 6.789011 Standard E r r o r of the Regression = 0.04-4-322 Ordinary Least Squares Dependent Variable ... SPAX Independent Variable Estimated C o e f f i c i e n t Standard E r r o r S t a t i s t i c C CMX CEBX MONX -0.20149196E-02 0.12611162E-01 -0.15977269E 00 0.17324-156E 00 0.4-0960677E-01 0.42294598E 01 0.23965877E 00 0.15088177E 00 0.15883875E 01 0.60899764-E 00 0.502014-34-E 00 0.12131081E 01 R-Squared = 0.3683 P - S t a t i s t i c ( 3, 34-) = 6.608644 Standard E r r o r of the Regression = 0.04-4-544-Ordinary Least Squares Dependent Variable ... SPA Independent Estimated Standard (in-variable C o e f f i c i e n t Error;;' S t a t i s t i c C -0.58730591E 02 0.20630630E 02 -0.28467665E 01 CMI 0.16652751E 00 0.86603165E-01 0.19228802E 01 CEBD 0.14375085E 02 0.20030174E 01 0.36663380E 01 BIR 0.13316848E 02 0.36321926E 01 0.36663380E 01 R-Squared = 0.8856 P= S t a t i s t i c ( 3 , 34) + 87 .713333 Standard E r r o r of the Regression = 9.516687 Ordinary Least Squares Dependent Variable ... SPA Independent Variable Estimated C o e f f i c i e n t Standard E r r o r T-S t a t i s t i c C -0.75292006E 01 0.11067873E 02 -0.68027526E 00 CMI 0.20317638E 00 0.69194674E-01 0.29363003E 01 CEBD GNP R-Squared = F - S t a t i s t i c ( 0.74-55884-9E 01 0.25108414E 01 0.14-089698E-02 0.25328202E-03 0.9164-3, 34-) = 124.255310 0.29694757E 01 0.55628490E 01 Standard E r r o r of the Regression = 8.133811 Dependent Variable .. SPA Independent Variable Estimated C o e f f i c i e n t Standard E r r o r T-S t a t i s t i c C -0.504074-71E 02 0.131554-37E 02 -0.38316832E 01 CME 0.24840140E 00 0.68586648E-01 0.36217165E 01 CEBD 0.56171970E 01 0.25234680E 01 0.22259827E.01 MOND 0.9564-5744-E 00 0.15287215E 00 0.62565832E 01 R-Squared = 0.9258 P - S t a t i s t i c ( 3, 34) = 141.374069 Standard E r r o r of the Regression = 7.664356 Dependent Variable SPA Independent Variable Estimated C o e f f i c i e n t Standard E r r o r On-S t a t i s t i c C -0.27301270E 02 0.12301699E 02 -0.22193089E 01 CMX 0.94-120293E 01 0.85868158E 01 0.10961018E 01 CEBD BIR-: R-Squared 0.16533432E 02 0.16774387E 01 0.8268204-7E 01 0.24216909E 01 0.8775 0.98563547E 01 0.3W-2275E 01 E - S t a t i s t i c ( 3, 3*0 = 81.155289 Standard E r r o r of the Regression = 9.848307 Dependent Variable ... SPA Independent Variable Estimated C o e f f i c i e n t Standard E r r o r T-S t a t i s t i c C _o.74524-593E 01 0.14645797E 02 -0.50891572E 00 CMX 0.63663759E 01 0.99991665E 01 0.63669062E 00 CEBD 0.19658951E 02 0.20496082E 01 GNP 0.12180156E-02 0.40383376E-02 R-Squared = 0.8359 P - S t a t i s t i c ( 3, 34) = 57.725922 Standard E r r o r of the Regression = 11.397113 0.95915642E 01 0.30161309E 00 Dependent Variable ... SPA Independent Variable Estimated C o e f f i c i e n t Standard E r r o r T-S t a t i s t i c C -0.15390148E 02 0.10003167E 02 CMX 0.10733526E 02 0.76587868E 01 CEBD 0.11648415E 02 0.20963163E 01 MOND 0.55693525E 00 0.11478907E 00 -0.15385275E 01 0.14014654E 01 0.55566111E 01 0.48318143E 01 R-Squared = 0.9028 P - S t a t i s t i c ( 3 , 34-) = 105.227417 Standard E r r o r of the Regression = 8.772624 Dependent Variable SPA Independent Variable C CEBD Estimated C o e f f i c i e n t Standard E r r o r T-S t a t i s t i c -0.26259903E 02 0.12300202E 02 -0.21349163E 01 0.16645676E 02 0.1679H82E 01 0.991334-34E 01 BIR 0.794-78130E 01 0.24-108906E 01 0.32966290E 01 R-Squared = 0.8731 P - S t a t i s t i c ( 2, 35) = 120.4-39163 Standard E r r o r of the Regression = 9.876603 Dependent Variable SPA Independent Variable Estimated C o e f f i c i e n t Standard E r r o r T-S t a t i s t i c C -0 .79377928E 01 0.14499164E 02 -0.54-746556E 00 CEBD 0.19784-744E 02 0.20226564E 01 0.97815638E 01 GNP 0.79754-367E-03 0.39499886E-02 0.20191032E 00 R-Squared = 0 .8339 P - S t a t i s t i c ( 2, 35) = 87.879181 Standard E r r o r of the Regression = 11.299884 Dependent Variable SPA Independent Variable Estimated C o e f f i c i e n t Standard E r r o r T-S t a t i s t i c C CEBD MOND R-Squared --0.14-7674-70E 02 0.10129988E 02 -0.14-577971E 01 0.11938352E 02 0.2114-6126E 01 0.564-564-4-2B 01 0 . 5 3 5 8 9 5 1 7 E 00 0.11535954-E 00 0.4-64-54-334-E 01 0.8972 P - S t a t i s t i c ( 2, 35) = 152.654-54-1 Standard E r r o r of the Regression = 8.892617 A SURVEY OF CONSUMER BUYING INTENTIONS SEPTEMBER 1970 A COPY OF THE QUESTIONNAIRE Conducted f o r : MACLEAN-HUNTER RESEARCH BUREAU CONTEMPORARY RESEARCH CENTRE LIMITED TORONTO *** MONTREAL CONSUMER BUYING INTENTIONS Do you or do any members of your household have any plans to buy an automobile, e i t h e r new or used, within the next s i x months? 1 Yes 2 No I f "Yes" i n Q.la, ask: l b . As you probably know, there are four main types of automobiles now on the market. There are the small cars, mostly imported such as Volkswagen, Austin Austin and Renault; the compact cars such as Chevy I I , Falcon and V a l i a n t ; the intermediate size cars l i k e Chevelle, Plymouth, Belvedere and Ford F a i r -lane; and the large standard cars l i k e Ford, Mercury Chevrolet, Buick, C a d i l l a c , Plymouth or Chrysler. Keeping these four groups of cars i n mind, now of course i t i s d i f f i c u l t f o r you to say, but i n which one of the classes do you think you would a c t u a l l y be buying a car? A small car, a compact, an intermediate or a standard model? 1 Small 2 Compact 3 Intermediate 4- Standard l c . W i l l i t be a used automobile or a new automobile? 1 Used 2 New 3 Not Sure Please t e l l me, as I read out t h i s l i s t of appliances, i f you or any other member of your household have any plans to buy any of these appliances within the next s i x months, that i s , between now and the next s i x months? Re f r i g e r a t o r Washing Machine T e l e v i s i o n Set A i r Conditioner Dishwasher Clothes Dryer Deep Freezer Vacuum Cleaner Gas or E l e c t r i c Range Not Yes No Sure 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 3 . Bo you or does anyone i n your household plan to buy fu r n i t u r e within the next s i x months? 1 Yes 2 No 3 Not Sure 4-. Do you or does anyone i n your household plan to buy f l o o r coverings, that i s , carpeting, rugs, linoleum or f l o o r t i l e within the next s i x months? 1 Yes 2 No 3 Not Sure 5 a . Do you, or anyone i n your household, have any plans to rep a i r , remodel, or make improvements on your home between now and the end of the next s i x months? 1 Yes 2 No 3 Not Sure I f "Yes" i n 0 . 5 a , ask: 5 b . W i l l the t o t a l cost be $100 or more? 1 Yes . 2 No 3 Not Sure 6a. Do you plan to take a vacation away from home, during the next twelve months? 1 Yes 2 No 3 Not Sure I f "Yes" i n Q.6a, ask: 6b Where do you plan to go? 1 , Maritimes 2 Quebec 3 Ontario 4- P r a i r i e s 5 B r i t i s h Columbia 6 U.S.A. (except F l o r i d a ) 7 Europe 8 F l o r i d a 9 Other Countries 0 Undecided X Other Answers (Specify): 6c. How w i l l you get there? 1 Automobile 4- Plane 2 Bus 5 Ship 3 T r a i n 6 Other (Specify): 7 a . Do you or any members of your household have any plans to buy a house, e i t h e r new or l i v e d i n , within the next s i x month? 1 Yes 2 No 3 Not Sure I f "Yes" i n Q . 7 a , ask: 7 b . W i l l i t be a new house of one that has been l i v e d in? 1 New 2 Lived In 3 Not Sure 8. Based upon what you hear from people t a l k i n g , would you say that jobs r i g h t now i n t h i s community are p l e n t i f u l , not so p l e n t i f u l , or hard to get. Or what do you hear? 1 P l e n t i f u l 2 Not so P l e n t i f u l 3 Hard to Get 4 Other (Sp e c i f y ) : 9. Considering everything, would you say that your family i s b e tter o f f f i n a n c i a l l y , the same, or worse o f f f i n a n c i a l l y now than i t was say s i x months ago? 1 Better Off 2 The Same 3 Worse 1 0 . Again, considering everything, do you think that your family w i l l be better o f f f i n a n c i a l l y , the same or worse o f f f i n a n c i a l l y say s i x months from now than i t i s now? 1 Better Off 2 ,The Same 3 V/orse 1 1 . How do you f e e l the job s i t u a t i o n and o v e r a l l employment w i l l be i n t h i s community, i n say s i x months from now? Do you think that there w i l l be more jobs, fewer jobs, or about the same as now? 1 More 2 Fewer 3 About the Same 1 2 a . In your opinion, how do you think the food p r i c e s are going to be say s i x months from now? Do you think they w i l l be lower, j u s t about the same, or higher? 1 Lower - 3 Higher 2 Just about the same 4- Not Sure 12b. How about major items l i k e a ear or a household a p p l i -ance. Do you think that p r i c e s f o r items such as these are going to be lower, j u s t about the same or higher say s i x months from now than they are now? 1 Lower 2 Just about the same 3 Higher 4 Not Sure 13a. Do you think that r i g h t now i s a good time or a bad time to buy a house? 1 Good 2 Bad 3 Not Sure 13b. Do you think t h a t • r i g h t now i s a good time or a bad time f o r the average person to make a major outlay f o r things such as a home or a car or some other major item? 1 2 3 Good Bad Not Sure 

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