Detrended wealth predicts stock returns better than popular forecasting variables.
Detrended wealth movements can predict stock returns. When wealth deviates from its usual trend with consumption and income, it signals future stock returns. This trend in wealth is a better predictor of stock returns than dividend yield or earnings yield. The study used U.S. quarterly stock market data to show that these deviations in wealth can forecast real stock returns and excess returns over Treasury bills.