From the Abstract: "We use data from the aggregate equity market and dividend futures to quantify how investors' expectations about economic growth across horizons evolve in response to the coronavirus outbreak and subsequent policy responses. Dividend futures, which are claims to dividends on the aggregate stock market in a particular year, can be used to directly compute a lower bound on growth expectations across maturities or to estimate expected growth using a simple forecasting model. We show how the actual forecast and the bound evolve over time. As of May 12, our forecast of annual growth in dividends is down 16% in the US and 23% in the EU, and our forecast of GDP [gross domestic product] growth is down by 3.6% in the US and 5.0% in the EU. The lower bound on the change in expected dividends is -29% in the US and -38% in the EU at the 2-year horizon. There are signs of catch-up growth from year 3 to year 7. News about economic relief programs on March 13 appear to have increased stock prices by lowering risk aversion and lift long-term growth expectations, but did little to improve expectations about short-term growth. Expected growth deteriorates between March 13 and March 18. News about fiscal stimulus around March 24 boosts the market and long-term growth but again did little to increase short-term growth expectations. Expected dividend growth has improved since April 1 both in the US and EU. We show how data on dividend futures can be used to understand why stock markets fell so sharply, well beyond changes in growth expectations."
University of Chicago, Becker Friedman Institute for Research in Economics