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The Determinants of US Stock Market Returns

In the literature there are many determinants for the times series of US stock returns. The most notable are: inflation, inflation uncertainty, and the relative change in the value of the US dollar. This paper aims to reconsider and update this research question. Monthly data sets are used with the S&P 500 as the measure of the stock market index, and the US trade-weighted foreign exchange rate index as the measure of the US dollar. Least squares regressions, GARCH regressions and least square regressions with endogenous calendar breakpoints are estimated. The evidence is strong that US inflation and US inflation uncertainty do not have an impact on US stock market returns. However, for the recent sample, a significant relation between the US S&P 500 and the US dollar exists, while in the older sample such a relation is negated. Finally, there is evidence that the growth rate in the money supply has a negative and delayed impact on US stock returns whatever the econometric specification. This anomalous relation runs against market efficiency.