Tag Archives: finance

January thru June 2025: Stocks positive next 6 months, but plenty of worries.

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My models for various US stock market indexes are surprisingly positive for the first half of 2025: flat to negative for January, but then generally rising over the next 6 months. The forecast for the NASDAQ 100 ( ^NDX) is strong. My older monthly-based models for the S&P 500 and the ValueLine Arithmetic Average are not as encouraging, just flat for the coming half year.

The models reflect a strong macroeconomic picture. Gross Domestic Product is robust, running about 2% above the Real Potential GDP model maintained by the Congressional Budget Office. Inflation for consumers and industrial commodities is down, so the Federal Reserve has shifted from trying to restrain the economy to a more neutral stance. Interest rates are high-ish compared to the past half-decade, but rates are modest compared to the past half-century. Crucially, long-term interest rates have finally climbed above short-term rates; that is a good thing as it gives the financial sector room to breathe. Money supply if easing a bit; that’s always nice. Corporate profits remain strong. Several indicators say prospects for a near-term recession are minimal. Unemployment at 4.1% has crept up slightly, but is historically good. We are on the leading edge of major technological change through Artificial Intelligence, and already there are huge new capital investments underway with prospects for more to come. The stock market has scored up the best two-year returns since 1998! What’s not to like?

Unfortunately there are three problems that eventually will slam the stock market. The only real question is: When?

First, the US economy is only glowing brightly because of huge and unsustainable federal government budget deficits, not mainly through real intrinsic growth. Second, even if the economy was not propped up unrealistically, the market is still way over-priced by nearly all traditional valuation measures. Third, all other industrialized countries are going through the same process of cutting covid-related government deficits. Already, the parliaments of Germany, France and South Korea have fallen because there were no agreements on budgets going forward. Bond markets are starting to worry.

And, it is totally unclear what the U.S. Congress is going to do about the budget this spring. Will the deficit shrink or will it explode in size? Unknown. Aside from that, everything is great, and it doesn’t seem like the world is ready to explode this month.

I recalibrated my long-term trendlines for the S&P 500 and the Equal Weight S&P 500. The recalibration better recognizes the impacts of inflation on the market. The modified trendlines have a slightly better fit with the past 4 decades of market behavior. The good news is that according to the new trend lines the S&P 500 is somewhat nearer to trend and the Equal Weight S&P 500 is actually slightly below trend.

Happy New Year!

… The stock market year should start out benignly calm

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(For the next year or so I will report on two sets of market forecasts. I will keep up my monthly forecasting models which I have documented for about 17 years. I will also be reporting monthly on newer market forecasting models that create forecasts on a daily basis. These newer models, however, have only about a year of forward-testing. I apologize in advance to both of my readers for confused reporting on the two sets of analyses.)

My original forecasting equations originating in 2007 are somewhat negative for the US stock market for the first half of 2025. My newer, much more data-intensive forecasts are mildly positive for the next 6 months. The difference isn’t huge, but it is real.

The stock market has been making new highs, climbing the Wall of Worry, and is historically overpriced. In the near term, stocks have plenty of room to fall down, but little chance of quickly falling up. Given those caveats, my forecasts for the near future are mildly positive.

My long term trend models for the US stock market keep showing a developing price bubble. The S&P 500 is 15% above trend and the equal-weighted version of the S&P is 12% above trend. This bubble will probably keep growing. The bubble is still minor in comparison to the Dot-Com Bubble before 2000.

The Federal Reserve has begun to reduce short term rates, but the high level of short-term rates compared to long-term interest rates is still a very real negative factor in finance. Banks can’t make money lending money for long terms if they need to pay very much for short-term funds. They are painfully squeezed and have only been saved through Federal Reserve intervention.

On the other hand, truly massive Federal deficit spending — currently 6.11 percent of GDP — is dominating the economic situation. For comparison purposes, the total economic contribution of ALL FARMING to GDP is less than 1% of GDP ( 0.7%). Including all agriculture, food, and related industries takes the share up to just 5.6% of GDP. So, the US current deficit of greater than the economic impact of all the food we consume — all the food, supermarkets, restaurants, warehouses, even the Taco Bells! That is an incredibly high level of splurge spending that has only occurred during major national emergencies. It is not sustainable.

This spring the new administration and the new Congress will begin to deal with the deficit situation. It will either get better or get worse. (If you think the deficit will improve significantly, I’d like you to consider buying a nice bridge I recently obtained in Brooklyn.) Recent increases in long-term interest rates show that Big Money expects the deficit to get worse. In that case the stock market’s developing Bubble will expand. The math is pretty simple.

Time for giving thanks

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(No forecast, just words.)

I am especially thankful that none of my forecasting models can read the newspaper, or even know what I think.

The only things the models know are long established reputable economic data series. Each data set has been publicly available for at least 10 years; most have at least 3 decades of experience. A few go back much further. Each variable has a proven statistical relationship to at least some stock market prices. (Mimimum 95% confidence level.) Nearly two decades ago the models started with about a dozen key economic variables, but now roughly 4 dozen macroeconomic variables are included along with millions of data elements from individual stocks. Variables still are almost entirely focused on the US stock market. Things started with a single macro model that went unchanged for years. Now there is an AI swarm of thousands of models, each with a slightly different point of view, and each having to prove its current value and accuracy profile. Each model gets refined on a weekly basis. Every forecast for any stock results from a minimum of 30 independent analyses.

I started these stock forecasting models because I was absolutely horrible at picking and timing stock purchases. My heart, emotions and hunches always got the best of me. Partly for that reason, there are no parts of the models that include my own expectations (like on interest rates or corporate profits in the coming month). Very pointedly, however, I do include a number of variables that do have a high ’emotional’ quotient. The VIX market ‘fear gage’ is one example. Numerous long-standing surveys make the cut as well.

My point in saying all of this is that over the next year or so it seems highly likely that individual stocks and the stock market will have an unusually high level of uncertainty. The stock market DOES read the newspaper and dwells on rumors and false trends. I expect to see unusually high volatility. Should that occur, the models reported on here will almost certainly predict a reversion back toward trend.

In the end, I trust the stock market will usually do what it usually does in response to changing economic circumstances. That’s what it has done for the past 17 years, at least. Who knows, maybe all of that will change, and pigs can start to fly. Perhaps, but I have no evidence of that.

We are in the early stage of what promises to be a major US stock market bubble. This is unlikely to be especially high and sustained real economic growth, just pure bubble. And it could last for a couple of years.

May thru October 2024: OK, the market dropped a little faster than the forecasts predicted.

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Last month these forecasts expected “the primary market indexes to pause and then retrace a bit”. Well, they did, but I grant that they went down more than a tiny bit. Anyway, the current forecasts expect the downward trend to continue for the next month or two. Nothing really major, but highly likely the market will drop some more. (Why? The equations say to blame the 1/2% increase in the 10-year Treasury rate.)

Last month the forecast for the S&P 500 was less than 1/2 of one percent positive. (Sub-Meh) But, it was POSITIVE, and for the last several months the market has been behaving above expectations. Now the tide has shifted and all the major indexes have projected 1-month losses of -1% to -3%. Does not look horribly bad, but the immediate expectation is now negative, and for the broader market the 6 month forecast is negative. The old adage “Sell in May…” looks like a winner this year.

I have a new graph to unveil. Of the 600+ large-cap stocks I follow, I keep score of the number that have strong positive 1-month forecasts versus the number with strong negative 1-month forecasts. This next graph shows the “bouncing-ball” output. The blue line is the net positive/negative score and the red line plots what actually happened to the S&P 500 for these months. (Ignore the last red month, it hasn’t happened yet.) Anyway, the net forecast is for a negative period that plays out something like last October-November.

Otherwise, nothing is seriously wrong with the stock market. The S&P 500 is bouncing along its normal boundary, busily deciding if it wants to begin a new and wonderful “AI Bubble”. (My hunch is that it will.) The more staid VALUE LINE Arithmetic Average is right at its long term trend line.