Assessing the Impact of Macroeconomic Variables on the Performance of the U.S. Stock Market

Using S&P 500 and Dow Jones Industrial Average indices as the benchmark to measure the U.S. stock market, the study focused on assessing the effects macroeconomic variables on the performance of stock market. Using multiple regression model, the study found a negative correlation of unemployment rate and GDP growth rate on the stock market performance but established a direct relation with inflation and the stock market performance. The study concluded that, the negative relationship with GDP growth rate was because the U.S. stock market tracks its performance from the global technology industry rather than economic growth whiles unemployment rate was due to the fact that, depending on the economic scenario, this variable affects the stock market differently. However, the direct relationship between the inflation because a high inflation rate reduces the purchasing power which affects the number of stocks bought and the income generated from the stock market.

structural transformation in economies from the traditional, insecure bank-based and rigid to a more flexible and invulnerable to surprises, variabilities and lack of investors' confidence. The stock market is a market where shares, bonds, cattle or fruits traded between individuals or organizations over the internet or a phone call. Patrick and Wai (1973) defines stock market as those markets that allows companies to generate capital (short -and longterm) and investors to own equities. This activity of buying and selling stocks and shares is highly significant in capital allocation within economies (Pratten, 1993). Also, Pratten (1993) argues that selling and buying stocks and shares provides the investors with a signal of market value of their investment which may ultimately influence their consumption decision. The development and facilitation of the stock market promotes efficient resource mobilization and allocation to the various sectors of the economy which promote economic growth (Errunza, 2001). According to Chatziantniou et al. (2013), the stock market can spearhead the direction and performance of all sectors of the economy and as such, provides an alternative route for transmission mechanism for policy action.
In light of establishing the roles and functions of the stock market, Fabozzi et al. (2002) established three roles for the market: (1) the interactions of buyers and sellers determines the price of the traded asset; the market provides an avenue for buyers and sellers to sell and buy their assets; and the market reduces cost of transactions.

Importance of Stock Market to Economic Growth
According to Islam & Watanapalachaikul (2005), stock market performance determines the wealth and performance of an economy. The market can be regard as a cornerstone that spearhead the smooth transfer of funds primarily for economic growth (Zafar, 2008) [ 1 ]. Levine (1996) agreed with Islam & Watanapalachaikul and emphasized that, the stock market perform an important financial function in any given economy by ensuring an efficiency in capital allocation to promotes economic growth through the mobilization of savings, provision of liquidity, risk diversification and provide some form of corporate control. The market also allows private firms to raise long-term capital through the issuance of equity to finance their businesses (Feldman & Kumar, 1995;Rousseau & Wachtel, 2000). Levine (1991Levine ( , 1996 furthered the linkage by arguing that the stock market can influence economic growth through their liquidity to ensure firm investments are not interrupted.

The United States Stock Performance Indexes 2.1.2.1 The Dow Jones Industrial Average Index (DJI)
The oldest index in the stock market, the DJI was developed by Charles Dow and it consists of 30 of the largest and most influential companies often referred as the blue-chip companies. This index reflects the current business climate in the U.S. because it is about a quarter of the value of the entire stock market and a change in the index represents a change in investors' earning and risk expectations of the large corporations included in the index (Statefarm, n.d.;Caroline, 2020) [ 2 ]. The DJI uses the share prices in with a divisor in its weightings instead of using market capitalization to arrive at a final value.

The Standards and Poor (S&P) 500 Index
This is a market-cap weighted index that shows the change in total stock performance and the value of the companies included in the index. The S&P 500 comprises of 500 of the largest companies in the U.S. To be included in the index, a particular keen interest in liquidity, public float, sector classification, financial viability and liability is taken into account. The index represents about 80% approximation of total value of the U.S stock market (StateFarm, n.d.;Caroline, 2020). The S&P 500 is calculated by weighting the market capitalization of the companies included in the indexand dividing it with a divisor set by the S&P.

The Nasdaq 100
This is a market capitalization technology focused index that features over 100 largest traded and international non-financial business in the U.S. This index is the only U.S based having international companies included: Willis Towers Watson (Ireland); ASML Holdings (Netherlands), ets.

The Current Research in focus
There is a strong correlation between all these indices as they trade the performance of companies under the same business environment affected by the same macroeconomic variables. However, the DOW is often criticized for its failure to keep abreast with the current or new economy and also its continuous effort to maintain the oldfashioned ways of weightings. Despite these criticisms, the DOW has performed better in the last 5years (an annualized 12.4%) than the S&P 500 (annualized 11.4%) (Barry, 2019). It is necessary to point that, the DOW has the least volatility among all the major indices and lacks marquee technology stocks like AMAZON, GOOGLE, and uses share price in its weightings instead of market capitalization. These reasons present the DOW as the best index for this current research to ascertain the overview of economic performance of the last decade.

Macroeconomic Variables
In the context of this paper, the literature on the U.S macroeconomic indicators was screened to include the variables that affect the financial markets especially the equity markets since the theme for the paper concerns on the risks imposed by macroeconomic variables on stock performance, the variables that will be included are: inflation rate, unemployment rates, and the Gross Domestic Product.

Gross Domestic Product
Over the years, there have been debates within empirical researchers, investors and other players in the financial industry on the correlation that exists between economic growth and returns from the stock market. In recent times, emerging economies have been experiencing consistent economic growth and players in the finance industry contemplate whether they should allocate a higher weight to the economy based on the GDP rather than market capitalization (MSCI, 2010). In an attempt establish the link, several researchers found the link between stock market returns and GDP to be negative (Dimson et at., 2002;Ritter, 2005;MSCI, 2010). MSCI, using data from 1958 -2008 on developed economies had a result of negative correlation between economic growth and returns from stock market. In theoretical setting, faster growth in economy suggests faster growth in sales for companies which potentially increases the returns from the stock market, but in reality, there are other underlying factors that affect returns from the stock market rather than the economic growth outlook [ 1 ] (Kleintop, 2018).

Consumer Price Index (Inflation)
The measurement of weighted average price of basket of consumer goods and service, the consumer price index is considered a very vital macroeconomic variable often used to ascertain the relationship macroeconomic variables have with the performance of the stock markets (Hussainey and Ngoc, 2009;Schlögl, 2018). Many researchers (Nasseh and Strauss, 2000;Wongbangpo and Sharma, 2002;Gunasekarage et al., 2004) argued that the CPI[ 2 ] is one specific factor often used as proxy to represent many macroeconomic indicators such as discount rate, inflation and the goods market: Gunasekarage et al. (2004) found the CPI as proxy to inflation had significant impacts on the Sri Lanka Stock market; using the CPI as proxy to goods market, Wongbangpo and Sharma (2002) studied the effects goods market on five Asian (Singapore, Malaysia, Philippines, Indonesia and Thailand) countries and found a negative impact between the CPI and the stock prices. This research supported the longstanding research works by Fama & Schwert (1997), Sweeney & Warga (1986) and Jain (1988) who had longed believed that CPI has negative correlation with stock markets. Recent study by Adams, McQueen & Wood (2004) built on that assertion and found that 1% change in Consumer Price Index reduced the stock market returns by -1.289% on intraday basis. This work furthered the argument that CPI (inflation) negatively impact the returns from the stock market not only in the long-term but also in the short-term. Notwithstanding, a research by Nasseh and Strauss (2000) found a positive correlation between high inflation high stock prices. In the nutshell, there is a directly correlation between CPI and the performance or returns from the stock market

Unemployment Rate
Although, there seem to be conflicting findings from various literature on the actual effect of unemployment rate on stock returns, this indicator over the years proves to be critical since it directly affects the spending capacities of the individual. Nikkinen, et al. (2006) revealed that reports from employment statistics is critical to the wide measure of the economy, which directly affects the financial market. McQueen & Roley (1993) argued that an unexpected decrease in the rate of unemployment led to the reduction of stock price by 2.2%. Nonetheless, recent studies provide contradictions to the existing consensus. According to Boyd & Jagannathan (2005), depending on the state of the economy, unemployment rates affect the returns from the stock market. To them, during economic recession, a positive news from employment data will affects stock prices positively whereas during economic expansion, a positive data from employment data will cause stock prices to fall. Further, Birz & Lott (2011) did not find any actual effect of unemployment on stock prices, particularly with S&P 500 data from 1991 -2004.

Model Construction and Estimation Approach
The study will first obtain the general impact of macroeconomic variables on stock market performance with the model 1 using the DJI as the benchmark SPDJI = + GDPGRt + INFt + UNMt (1) The study will further test the same economic variables on S&P 500 index in attempt to measuring the performance using the S&P 500 as the benchmark SPS&P500 = + GDPGRt + INFt + UNMt (2) The SP = Stock Price (DJI and S&P 500) at the specified date range, GDPGRt = the Gross Domestic Product Growth Rate of the U.S. at the stipulated time range, INFt = the U.S. inflation rate within the specified date range, and UNMt = the Unemployment Rate within the study date range.  The figure above elaborate the actual effects of the macroeconomic variables on the performance of both DJI and S&P 500. There was a direct positive correlation between the Inflation variable and the performance of both Indices. These results collaborate with the findings of Fama & Schwert (1997), Sweeney & Warga (1986), Jain (1988) Gunasekarage et al (2004) who longed argued that Inflation (CPI) has a direct relationship with the performance of the stock market. From the above graph, it indicated that the prevailing inflation rate in the U.S. directly influenced the performance of the stock market. Thus; a direct change in inflation had a direct impact on Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697(Paper) ISSN 2222-2847(Online) Vol.11, No.14, 2020 the performance of both the DJI and S&P. Unemployment regressed negatively with the performance of the two indices which further highlights the research findings of Boyd & Jagannathan (2005), who argued that depending on the economic state of the country, unemployment rates affects the stock market differently. However, from the findings of this research, unemployment rate does not affect the U.S stock market performance using the DJI and S&P 500 as the benchmark. GDP Growth rate also had an inverse relationship with the performance of the stock market and this result agrees with the findings of Dimson et at., 2002;Ritter, 2005;MSCI, 2010. Kleintop (2008 who suggested that intuitively, economic performance should directly reflect with the performance of stock market but in reality, the returns from the stock market premises on other factors -in U.S, the market tracks the performance of the global technology sector.

Conclusion
This research focused on establishing the effects macroeconomic indicators have on the performance of U.S. stock market using both S&P and Dow Jones Industrial Average as the benchmark. The research employed regression analysis and showed that inflation (INF) had a direct correlation on the performance of both stock indices. This relationship could be explained by the fact that an unexpected increase in inflation causes a decrease in the purchasing power -thus; few stocks will be bought which directly affects the income from stock prices to the corporations.
The negative impact GDP Growth rate showed could be explained by establishing that in theory, an economic growth should translate to positive performing stock market but in real economy, there are other underlying factors that drive economic growth which does not directly affect the stock market whereas there are other underlying factors that drives the performance of stock market which does not directly causes economic growth. In the case of U.S. stock market, it had been established that it tracks its performance from the global technology industry rather than economic growth and that explains the negative relationship the regression model showed.
Unemployment also regressed negatively because depending on the economic scenario at that particular time, it affects the stock market differently. During contractionary economic scenario, high unemployment rates largely affect the performance of the stock market and in expansionary economic scenario, high unemployment rate has less significant effect on the performance of the stock market