Macroeconomics matter: Leading economic indicators and the cross-section of global stock returns

Abstract

Leading economic indicators assist in forecasting future business conditions. Can they also predict aggregate stock returns? To answer this question, we examine six decades of data from 39 countries. Short-term changes in the composite leading indicator (CLI) positively correlate with future stock returns in the cross-section. The quintile of markets with the highest CLI increase outperforms the quintile with the lowest CLI change by 1.43% per month. The predictive power of the CLI survives multiple robustness checks and cannot be absorbed by established risk factors. Our findings imply an exploitable investment strategy that can be pursued with exchange-traded funds.