OK, August turned out to be a bit more exciting than I had forecasted; the stock market flopped with a loud plop, down -7% at the start of the month. Stocks zoomed back up ,ending about 1% over where the month started.
Overall, as it has for months, the U.S. stock market continued to perform a bit better than my models have been expecting. And, that’s a good thing since the models are still mildly pessimistic. The basic economic situation is unchanged: the Federal Reserve is maintaining high interest rates with the goal of tamping down the economy. But, the U.S. Treasury is dumping new money into the economy through historically high deficit spending. Unemployment has crept up a bit. The housing sector has weakened a little. Corporate profits remain generally strong, and the probability of an actual recession stays fairly low. GDP is slightly above trend.
The Fed appears certain to change direction in September and to start lowering interest rates back down. The reality is that the Fed cannot cut rates much. The relentless Federal deficit will continue to push for inflation until at least next spring. Then, a new Congress and a new President will have no choice but to at least pretend to do something. I remain concerned for the stock market in late winter and early spring.
In the meantime the high flyers in the stock market have their backs against the “Wall of Worry”. New highs are occurring, and volatility will probably increase. The AI capital expenditure boom is real, and has further to run.
The S&P 500 is about 14% above its long-term trend line. That is a bit worrisome, and it could grow to become a bubble. The equal weighted Value Line Arithmetic Average is very near trend. Are we going to see something like the Dot Com Bubble as the next big market move? A populist President, a compliant Congress , and a castrated Federal Reserve could let it happen. That didn’t end well.
Six Month Stock Market Forecast 
“I remain concerned for the stock market in late winter and early spring”, is this econometric or guts?
Thank-you
Antonio
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Hi Antonio!
The U.S. stock market has much more room to go down than to rise up. The market keeps bumping up against a Wall of Worry as prices keep hitting new highs.
The market is over priced by all normal valuation measures. https://www.marketwatch.com/story/any-way-you-look-at-it-the-stock-market-is-dangerously-overvalued-now-14165afc?mod=search_headline
The economy as running unsustainably strong; hence the inflation and the need for the Federal Reserve to raise interest rates in the first place. The causative problem that remains in place is that the Federal deficit is running at 6.1% of GDP. That sort of deficit is uncommon except during wartime. It is not an acute financial problem for the U.S., but it is not sustainable for more than a few years. Federal spending is in a bubble, and so the stock market is developing a bubble.
Before the November presidential election no one is rocking the happy boat, and nothing is likely to occur before the new Congress convenes in January. The Federal Reserve will decrease interest rates slightly, but that will have only a small and delayed real economic impact.
But, come January, it appears almost certain that a sudden turn will be considered.
If Trump is elected it is likely that he will remain a populist and force his party to maintain or even expand the deficit. It is also likely that there will be serious threats that certain portions of spending are curtailed. My guess — and it is just a guess – is that the populists will prevail and the stock market will expand into an unsustainable bubble.
If Harris is elected, then it is all but certain that the Republican Party will seek to massively curtail government spending.
With either scenario, I am almost certain that there will be major moments of uncertainty about enough government spending to amount to several percent of GDP. And these periods of sustained, major and well-justified uncertainty are the points when a significantly over-valued stock market will experience a precipitous fall(s) of unknown duration.
I doubt that my econometric models will be highly predictive at that point. While they are built on gobs of data about prior interest rate cycles, the models have a very small experience base dealing with periods of truly uncontrolled government spending. The models just won’t know what ‘usually’ happens.
Regards,
Tom
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