Tag Archives: stock-market

… 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.

Wall of Worry. Bubble Starting?

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Forecast October 2024 thru March 2025: Climbing the Wall of Worry continues. My oldest and most accurate long term models are skeptical about the market, and have been negative for months. These econometric models can never forget the plunging prices of past stock market crashes. That’s their job. They are supposed to worry.

This time might be ‘slightly’ different. I won’t be surprised if the models are overly cautious for several more months, and the market keeps gaining.

The U.S. stock market is climbing a “Wall of Worry“, a classic stock market expression that applies at about this time during every business cycle. Stock valuations have been rising for several years and now are high by nearly all measures. But, prices keep rising anyway. ‘Everyone’ knows the market is overdue for a tumble, but ‘nobody’ wants to miss out on the relentless gains that stocks keep washing in. Eventually ‘all’ markets do falter, and most speculators are completely surprised. My most recent and detailed models say the end may not be imminent, At least, not for the next few months.

At the request of one of my few readers, I am bringing back my oldest and ugliest chart to illustrate. My wife calls it ‘garish’ and she is never wrong.

The graph below displays all of my actual 6-month market forecasts going back to 2007. The shape of the graph is the S&P 500 plotted on a logarithmic scale. Each dot is color-coded with the dot color indicating the approximate forecast value for the coming 6 months. (So, ideally a big market drop should follow a black diamond, and a strong market rise should follow a big green triangle.)

The message here is that the negative (red) forecasts of the past several months paint the wall of worry, just like they did through the pandemic mini-bubble. Eventually, they will probably prove to be approximately correct. At some point not too far away the market will probably be cheaper than is is today.

The plot (below) of a long-term model of the S&P 500 shows what certainly looks like the start of a new market bubble. Since at least 1871, the growth of U.S. GDP and the U.S. stock market have corresponded quite closely. That is no surprise: GDP tries to estimate the total volume of goods and services, while the S&P corresponds to a big chunk of that same economic output. The trend line here plots the current (and future) path of the S&P 500 based on the ongoing relationship between Real Potential GDP and long term interest rates. It is far from a perfect model, but it shows a growing divergence: a new bubble? (This model shows the S&P 10% above trend, another model says 14% above trend.)

Here is a somewhat more positive look at a series of market index forecasts. The forecasts span from 1-week through 6-months. The models that produce these plots are based on gobs more data than my original models and are not quite as ‘fixated’ on the market crashes of the past. For good or ill, they are more trusting of current economic data.

If the Orange Octogenarian does something exceptionally bizarre in the next month, then all bets are off.

December 2023 thru May 2024: Party for Some, Many Start to Feel Hungover

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November was a fantastic month for most of the stock market, a wonderful pre-Christmas party, recovering the same 9% that it had lost in the months from August through late October. The party might well continue for some high flyers, but most stocks will probably stay in place for the rest of the year.

The spaghetti plot shows that the NASDAQ and NASDAQ 100 are expected to keep on climbing for the next few months with their party likely ending around March 2024. The S&P 500 is likely to pause over December and grow modestly during the early months of 2024. Non-tech parts of the economy, typified by the Dow-Jones Industrials and the Russell 2000 seem headed for a few weak months.

Looking at the long-term trend charts, it is clear that much of the ‘ordinary’ economy in the Value Line Arithmetic Index has been below trend for months, but the S&P 500 is almost exactly on trend. Of all my forecasts, Bank stocks as a whole appear headed for a few rough months — not surprising as long as short-term interest rates are higher than long-term interest rates.

The Alpha Test of forecasting a wide range of stocks and ETFs has been surprisingly successful so far. I hope that in January I will be able to upgrade it to a Beta Test — still experimental but a bit more deserving of attention.

Happy Holidays to all!