Countercyclical Return Expectations: Evidence from the Livingston Survey

Using the Livingston survey — the longest-running U.S. survey of professional economists, running twice a year since June 1952 — this paper shows that the expected excess stock return implied by these forecasters is countercyclical: low in expansions and spiking during NBER recessions. Across 13 business-cycle state variables, 11 give a significantly negative slope, with R² ranging from under 4% for the weakest of them up to 31.1% for the Chicago Fed National Activity Index; the two exceptions, the price–dividend ratio and the consumption–wealth ratio, also turn negative once the series are adjusted for the structural breaks documented by Lettau and van Nieuwerburgh (2008) and Bianchi, Lettau and Ludvigson (2022), or once the regressions are run in first differences. Applying the rationality test of Adam, Marcet and Beutel (2017), the authors are generally unable to reject the null of rational expectations at the 5% level, and the survey’s expected excess returns correlate positively with the model-implied expected excess returns of Martin’s (2017) log-utility investor (0.47), the Campbell–Cochrane (1999) habit model (0.35), and the Bansal–Yaron (2004) long-run risk model as estimated by Schorfheide, Song and Yaron (0.44). The same forecasters’ expectations for tax-adjusted corporate profits — available only from June 1971 — also vary countercyclically, though the evidence is weaker, with 7 of 13 state variables significant at the 5% level for nominal cash flow expectations and 6 of 13 for real ones. The authors argue the contrast with Greenwood and Shleifer (2014) reflects who is surveyed: the Gallup, AAII and Investor Intelligence surveys of individual investors imply procyclical and extrapolative expectations, while neither the habit nor the long-run risk model generates the countercyclical cash flow expectations the Livingston survey displays.

Stig v. Møller | Macro Paper Warehouse

Countercyclical Return Expectations: Evidence from the Livingston Survey