Stock Market Forecast Update November 11, 2013

My stock market models, forecasting the Value Line Arithmetic Index, are projecting near-average stock market performance over the next 6 months to 5/1/2014.

Probable 6 month market gain: 5% to 9%

Probability of at least breaking even: 73%
Probability of an 8%+ dip along the way: 9%.

 The basic drivers of the rebounding stock market are still in place, but weaker:

1: Economic performance remains below potential – that leaves room for improvement – but, less room than before.
2: Leading economic indicators are slowly rising – but, they are wobbly, conflicted, and near-flat.
3: Recession probabilities remain low because the Federal Reserve continues to hold down interest rates – but, worry grows about what will happen when the current “extraordinary measures” of the Fed are scaled back or stopped.

 A consequence of today’s weaker economic driving forces is that random factors – like the dysfunctional Congress – will be relatively more important going forward. That implies that econometric stock market models, like mine, will probably be somewhat less accurate over the next few years.

 All that really matters, though, is that the models get the main story right:

Really big move up: not so likely now
Really big fall: very unlikely without a Black Swan
Bumpy normal with a positive tilt: my best guess

 Last May’s forecast worked out unusually well.

 Forecast           Actual

Probable market gain:  12%                 11%
Prob. of gaining:          83%                  ü
8%+ midcourse dip:     50%                  Hit  -5%

Real time results of the models have been published since May, 2007.