The statistical forecasting model says:

December, 2022  

Next 6 Months:  -3.3%  (No big deal. Models vary from +2% to -9%)
Probability of at least breaking even: 50% – 80% (Meh.)

Back to publishing

During the pandemic I felt it would be a disservice to publish any forecasts.  My models are statistical, based on the assumption that what usually happens will usually happen again. At least sort of.  But, the pandemic hacked apart the normal economy, and the intervention by the Federal Reserve and the U.S. Treasury was incredibly massive.  The financial intervention saved us from immediate financial destruction, but it made a joke of my silly little econometric models.

We are now in something of a post-war situation, trying to get the economy back to a more normal footing.  Certainly high inflation, rising interest rates, and residual supply chain questions are real problems, but they are things the economy has faced many times before.

Going forward, as far as I am concerned, something like what usually happens will usually happen again. Phew.

One administrative note: during the course of the pandemic Google dropped the Feedburner service that had sent out subscribers notice each time I sent out a new post.  I am not sure whether the new subscriber widget with MailChimp works.  Please feel free to email me in the meantime at TomTiedeman@gmail.com.

Stocks Near Long Term Trend

The first chart shows the S&P 500 plotted with a long term performance model based largely on interest rates and Real Potential Gross Domestic Product.  It shows that after flying above normal during most of the pandemic it has returned to fairly near normal

(Click on image to enlarge.)

After bubbling a bit during the pandemic, the SP500 average is now rather near what I calculate as its long term trend.

Weak First Half Year

(Click on image to enlarge.)

The chart above displays six-month market forecasts since I started publishing in 2007. Note that each dot reflects the forecast for the 6 coming months, so the red negative forecasts from the peak of the pandemic months are really pretty good — the market did in fact go down.  Six month forecasts have again started to turn negative, but my short term models expect the year to probably start out fine.

Best Wishes to All!

The statistical forecasting model says:

Next 6 Months:  +11%  (Flavors of the model vary from 7% to +15%)
Probability of at least breaking even:  82% (Flavors vary from 59% to 97%)

(Click on graph to enlarge.)

(Click on graph to enlarge.)

(Click on graph to enlarge.)

 The statistical forecasting model says:

Next 6 Months:  +10%  (Flavors of the model vary from 0 to +20%)
Probability of at least breaking even:  78% (Flavors vary from 40% to 99%)

(Click on image to enlarge.)

The coronavirus pandemic is not ‘business as usual’ for humanity or the economy. I have no idea if these forecasts have any validity. 

Forecast April thru September 2020: +38% 
Probably of at least breaking even: 99%+

I have no special knowledge that says whether the current stock market crash and economic recession is actually different from human and economic disasters of the past.  The basic premise of the computer models I track here is that the market will do in the future roughly what it has done in the past — concentrating on a handful of key business and economic variables tracked since 1984.  But, at this point no one really knows what will happen next. Maybe the economy will commence a somewhat typical recovery, or maybe not.

What I think the forecasting models are saying is that six months is a very long time from now. A lot of surprises can and will happen. There is a tremendously powerful driving force for the economy to ‘revert to the mean’, to regain its long term path.  Already governments around the world have shown that they will do ‘all that is necessary’ to support the economy and return things back to normal.  People are clambering to get back to work and restart their normal lives. Eventually things will get better.

I did not believe how positive the models’ current predictions were when I first ran the calculations this month.  News of the pandemic is horribly grim.  We have really just started the economic quarantine process.  Most of the economic harm from shutting down much of the economy has yet to occur.  Things WILL get worse.

I doubted the data that drive the models.  Most of the economic variables that form the basis of the models are still highly positive and don’t reflect the sudden economic damage that is happening right now.  For example, the data I use still see a very low probability of a near term economic recession — that is obviously wrong. Similarly, leading economic indicators are still basically quite positive — wrong.

So, I ran the calculations again, but substituted drastically worse numbers for several economic variables.  This time the forecasts from the models were even more positive! Not what I was expecting. What the models seemed to say is that in ‘usual’ stock market crashes, by the time economic data can reflect just how much devastation has occurred, the stock market is already looking ahead to the coming recovery.

Good luck to all is getting through the near future. Stay safe.

Long Term Trends

TED will tell you day by day if the world economic system is in severe crisis. TED is really worried today.

A week ago, TED said the world economy was scared, but not yet in full panic mode. TED, the world bankers’ fear gauge, was at 0.15% in mid-February and 0.57% last week. Then everything hit the fan.  It now appears to be about 0.90%, a major warning signal.

The TED rate, or TED spread, is the difference between the interest rate of a 30-day U.S. Treasury Bill and the 3-month LIBOR, the rate charged to borrow U.S. dollars overseas among major banks.  Here is a link for the current 1-month LIBOR.  (The data on the FRED charts that I link below are one week out of date. Right now, that one-week time lag matters.)

In normal economic times the 3-month U.S. Treasury is just about the world’s safest and most liquid asset, and therefore the lowest interest rate in the financial world.  LIBOR (London Interbank Offered Rate) is generally the next best thing, a slight premium usually about 1/4 percent above the 3-month Treasury Bill. The TED rate is simply the difference between these two major short term interest rates. When TED is high, it means that major world bankers don’t trust each other, even for short term loans.

The world’s major bankers, like stock market speculators, are a nervous lot.  Things fluctuate daily  A 5-year view of the TED spread (below) shows lots of volatility, even in good times. Most recently TED shows a sharp spike.  Undeniably, bankers are getting scared about worldwide recession and possibly financial market breakdowns. The TED premium, even a week ago, was three times as high as it was in mid-February. Now it is 6 times the February level. (link)

But, it’s all relative.  In a 30-year view, the current TED spread is worrisome but not catastrophic. (link Gray areas show recessions.)  The message is clear: the world’s central bankers have good reason to be pulling out all the stops to try to keep the world financial system from collapsing.  There is a lot of doubt that all major players in the game are going to survive intact.

Lest anyone actually feel cheerful, looking at the long term plot of LIBOR  shows that the world interest rates have been falling for about a year, behaving like a major recession was on its way. (link)  And that was long before the novel coronavirus hit the world. Ulp.

Please ignore my forecasts for at least the next several months.  Feel free to also ignore my personal opinions below. They are not intended as stock market advice. I certainly do not know what is going to happen.

Apparently many people believe that fears of the novel coronavirus are grossly inflated. I sure hope they are right, but I don’t think they are.

The human and economic changes brought on by the coronavirus pandemic have only just started to hit worldwide.  About 3 months ago the virus did not even exist!  So far  less than 0.0001% of the world population has been infected.  Before this is over some epidemiologists fear that roughly half of the world population may have contacted the disease. This is nearly impossible to comprehend.  There are more unknowns about the pandemic than things we know.

The epidemic came upon us suddenly — a huge and horrible Black Swan.  Most of the data sources that form my models do not reflect the catastrophic changes that I believe will be slamming the world.  I will continue to post the monthly forecasts from my models since producing a public real time record of these forecasts has been the purpose of this blog from the start. I might as well be honest about just how wrong these forecasts turn out to be. Eventually, I trust the data I use will start to reflect our new realities.

It was probably a mistake, but a while ago I started posting about what I am doing with my own money.  My intent has not been to advise others, but just to be honest in indicating how strongly I believe in the econometric models. Now I am just logging the fact that I do not believe the rosy forecasts that are currently coming from the models.

Two weeks ago I wrote that I had closed my positively leveraged positions and went to approximately 70% invested.  I am now almost entirely out of the stock market and have some short positions.

My personal stock market opinions are often quite wrong — that’s why I created my objective models. But, for what they are worth,  here are my thoughts.

In my personal opinion this market downturn is far from over. 

There is a hope that the virus contagion will all blow over as the northern hemisphere warms up in summer.  As of today, many closings of schools, places of assembly, and other activities are being announced as temporary closures of two weeks or so. Many people believe that fears of pandemic are totally overblown.  It would be a wonderful miracle if the virus onslaught suddenly disappeared.  I personally doubt that will be the case.

The current world strategy has come to be called “social distancing”, or “flattening the curve” — curtailing countless human activities in order to slow the spread of the disease with a simple objective: keep the number of infections below the point where hospitals are unable to treat the vast flow of critically ill patients.  Many people may still die, but at least deaths will not surge because there is not enough room in hospitals. Clearly the hope is also to buy time needed to find better means of treatment and eventually to find a vaccine.

The social distancing strategy, however, has a very high and still largely unknown economic cost.

In very crude and inaccurate math, each week of lost employment leads to a drop of gross domestic product in the order of 2%. For a person to not work for a week they lose about 2 percent of their yearly output (1 week of about 50 yearly work weeks.) Someone pays for that lost output, either the employee, their employer, the customer, or the firm’s investors.  So, for the national economy a week of lost work for everyone is roughly a 2% drop in gross domestic product.  A couple of weeks of lost national work output probably would put us into recession.  I cannot even fathom what several months of lost output could mean.

The Great Recession of 2008 produced a GDP loss of 5.1%.  The S&P 500 dropped about 50% as a result. Hopefully I am quite wrong, but in my fears the coming recession and bear market have the potential to be much worse. After Friday’s  wishful thinking historic price surge, the S&P 500 is now down about 20% from it’s February high point. Just barely still in a Bear Market.

Certainly emergency measures by government will soften the economic blow for many people — more paid time off, unemployment, eased foreclosure rules, etc.  But, there will still be countless people and businesses who will receive crushing blows that government aid will not touch.  My local friendly restaurant already survives on a small profit margin — government aid isn’t going to replace all of the lost customers for months and months.  The same story is becoming true for much of the economy. The nation is now facing major industries such as air transit, retail, restaurants, entertainment and tourism shut down indefinitely.  The direct effects are likely huge. The ripple effects will be like tsunami’s!

When businesses and individuals go broke, new government programs and forms of assistance, no doubt, will provide some with loans and other forms of assistance.  But, we are still going to be faced with a large number of bankruptcies, foreclosures and bad loans.  Financial contagion could become a reality.  Political unrest in other parts of the world would not be a surprise. We aren’t there yet, true disaster has not hit. At the moment it is like we are all just taking a few weeks off after some kind of giant snow storm. But to me, the writing is now on the wall.

I do not feel that the worst has passed for the U.S. stock market.

Stay healthy!

IGNORE THIS MONTH’S FORECAST
The statistical stock market forecasting model says:
March, 2020  +5% 
Next 6 Months:  +17%  (Very high.)
Probability of at least breaking even: 95% – 97% (74% is long term average.)
What am I doing? Had been fully invested since spring 2009. Just closed leveraged positions. Still 70% invested, but worried. May sell more?

The novel coronavirus epidemic that has quickly spread to many countries is exactly the sort of Black Swan event that my models cannot predict.  These models are based on long term economic data, but the onset of covid-19 has been so rapid that the real economic impacts have not yet become apparent in the economic data stream. The epidemic is also totally unrelated to the normal business cycle that weighs heavily on how the models are constructed.

Please ignore my forecasts for the next few months.  I have no trust in them for now.

The current prediction coming out of the models sees a classic “buy the dip” opportunity.  The basic economic picture looks rosy (according to the data), hence last week’s selloff presents a wonderful buying opportunity — according to the model. But, I am not buying that story.

I certainly am no expert on viral epidemics, but a couple of things seem clear:

1. We should learn during March and April whether covid-19 contagion will die down during warmer weather like normal annual influenza spread. If not, a pandemic would seem to be certain. If the epidemic does end with warm weather, my optimistic forecasts could well prove to be correct. Totally unknown.
2. I don’t see much chance for any good news until at least the end of March when we will have the first indication of whether the contagion dies off with warm weather. That means at least one more month of raw fear in the market. Obviously that is a bad omen for the next month of market activity.
3. With or without millions of cases developing around the world, there will be a negative economic impact. World tourism has already had a body slam.  It wouldn’t be much of a surprise if quarantines, time off from work, and supply interruptions will stall economic growth enough to put the economy into at least a technical recession.  Even with a minor economic disruption, corporate profits could take a major hit that would continue to show for months after an epidemic ended.
4. There is so much that we do not know leaving us with no means to draw rational limits to our fears. The market might fall into a vicious cycle — market drops lead to more fears that, in turn, lead to further market declines. We just do not know.
5. Once the world feels safe again — whenever that happens — the collective sigh of relief will likely create an incredible buying opportunity. But, we really don’t have any clarity yet on how this will all play out.

The statistical stock market forecasting model says:
February, 2020  +2% 
Next 6 Months:  +11%  (Good.)
Probability of at least breaking even: 95% – 97% (74% is long term average.)
What am I doing? Fully invested since spring 2009. Preparing to worry later in the year.

All the flavors of my predictive market models remain decidedly positive.  There has been a drop in the enthusiasm of the forecasts over the past few months, but they remain strongly positive with a very low probability of net decline over the coming half year.

Of course these market expectations don’t mean that the market can’t have a horrible collapse right away.  Coronavirus or something else might blow things up. I don’t have any special insights on ‘black swans’.

The forecasts only mean that it the U.S. stock market responds to some key economic variables in pretty much the same way as it has behaved for the past several decades, then the market will probably do pretty well in the coming half year.

That said, to me (as opposed to my forecasting models), considerable stock market volatility with a negative slant seems likely until the world threat of coronavirus becomes better defined.

The statistical forecasting model says:
January, 2020  +3.3% (Very good, but January is always hard to predict.)
Next 6 Months:  +11%  (Excellent, not quite as optimistic as last month.)
Probability of at least breaking even: 95% – 97% (Still great.)
What am I doing? Fully invested since spring 2009, but preparing to worry later in the year.

 A headline at MarketWatch.com this week spouted: The U.S. economic expansion will last ‘many more years’ and 2020 will be good for stocks, says prominent economist.  That kind of grand claim always seems to come back sooner or later and bite the author on the butt. Reminds one of the eternally quoted statement by noted economist Irving Fisher that “stocks seem to have reached a permanently high plateau”. Fisher’s words came, of course, in early October, 1929, just a few weeks before the Great Crash of 1929.

For the past several months the projections by the several flavors of my predictive models have been strongly positive — more positive that I had expected. The expectations seem to have been largely on track — stock market performance through the fall and to the end of the year has been stellar. And, the current forecasts from my 6 month stock market models remain strongly positive. That’s the good news.

 The bad news is that two of my favorite predictors of an economic recession have ticked up for the first time in about a decade.  The increased risks of recession have not been enough to reduce these 6 month market forecasts. Yet.

I don’t know if the stock market will tumble — or jump up — later in the year. The models only look ahead 6 months at a time. The current direction, and the models’ predictions are for a blow-off top over the next few months.  Come February I expect to have a much clearer picture of how the market will perform later in the year. A recession either will, or will not come into focus.  My personal hunch (and not the models’ predictions) is that the end of 2020 will be very difficult. I am not changing my investments until the models turn decidedly negative.

Long Term Trends
The S&P 500 remains nearly 12% above the long term trend for the index.  The Value Line Arithmetic Index performed well in December — it remains about 4% below the long term average, but that is better than last month.  Overall the divergence between the S&P 500 and VALUA has decreased — and that is a good thing!  Neither index is far enough from its long term trend to indicate a serious market problem.  By way of comparison with a totally different market metric,  the Market Fair Value Graph at MorningStar.com indicated the market is about 4% above fair market value — not a serious problem.

Happy New Year to both of my loyal readers! Hang on tight!