Does the stock market contain information about economic growth? Time-varying out of sample causality tests

We present a new approach to conduct time-varying out of sample causality tests and apply our method to examine the information content of the stock market for economic growth in the US context. We show that equity valuations convey little information in the period after the 1960s. Particularly, there is no evidence to suggest that the recent bull market in equities is indicative of higher future economic growth. Hence, our results are against the argument that the stock market should be included as a leading indicator in economic policymaking.