The predictive power of cyclical consumption for stock market returns in the Nordic countries

Abstract

In this paper, I show that cyclical deviations from the long-term growth trend of consumption give useful information on future stock market returns in the Nordic countries. In-sample predictive regressions show significant negative correlations between the cyclical component of consumption and future returns across all Nordic markets. However, one-quarter-ahead out-of-sample tests suggest the cyclical consumption model outperforms a historical average forecast only in Finland. The in-sample results are economically sizable and robust to a number of alternative detrending methods.