Economic tracking portfolios

An economic tracking portfolio is a portfolio of assets with returns that track an economic variable. Monthly returns on stocks and bonds help forecast post-war US output, consumption, labor income, inflation, stock returns, bond returns, and Treasury bill returns. These forecasting relationships define portfolios that track market expectations about future economic variables. Out-of-sample results show that tracking portfolios, despite forecast deterioration, can be useful in forecasting macroeconomic variables.