Monday, March 24, 2014

Anticipating Summer Stock Market Blahs

(I will be on vacation for a couple of weeks, so I am posting this stock market forecast early. New data in the next few days might nudge the model's  6 month stock market forecast a bit, but probably not by much.)

According to the econometric model I developed, the U.S. stock market from this April through September should perform a little worse than average. The model forecasts the market nervously ending up right where it is. Intuitively that seems reasonable for what is statistically the worst part of the year. The chance of the stock market at least breaking even is roughly 50% -- distinctly worse that the normal 73% prospect of surviving intact.

For months and months, the good news for the stock market has been that the economy remains in tough straits, still needing a level of stimulus from the Federal Reserve that was unheard of before The Great Recession.  It got named The Great Recession for good reasons. As long as the economy is in tough shape it has room for improvement which is good for stock prices. Don't fight the Fed!

The bad news for stock market gains is that the economy and the stock market have improved tremendously from the depths of March 2009 -- so there is much less room for improvement than has been the case for the past several years. The net result is that the model expects the stock market to mark time or stall for a while.

Probable market gain from 4/1/2014 to 10/1/2014:    0%  (Average since 1984: 4.8%)
Probability of at least breaking even :    46% to 57%  ( Average since 1984: 73%).

This blog is about testing the econometric model in real time and in plain sight. So, how is the model faring? The forecast from October, 2013, the most recent 6 month period, was for a six month stock market gain of 11% which was almost exactly what occurred. (Measured using the Value Line Arithmetic Index as the standard.).  Sometimes the model just gets lucky. :o) For all forecast results since 2007 look at the graph below.

(Click on image to enlarge.)



Friday, March 14, 2014

Margin debt level is not too high -- yet

Recent articles such as this one or this one make the case that the level of  stock market margin debt today is at a dangerously high level. (Data on New York Stock Exchange Margin Debt is available with a two month delay here. )

The articles focus on a chart of NYSE Margin Debt like the one shown below.  The sharp peaks on the graph correspond to the Dot-Com crash of 2000 and the financial panic market collapse that got underway in 2007.  The graph gives the impression that the current spiking of margin debt must be pointing to another market crash coming sometime soon.  Or does it? Maybe the graph isn't showing the real story.
(Click on image to enlarge)

Margin debt, like the stock market, has a long term trend of growing several percent year after year. Because of this fairly steady growth rate you can get a more helpful view by changing the vertical axis to a logarithmic scale, making the same data look somewhat less scary.

(Click on image to enlarge)

Look at a longer time period (since 1980) and add in a trend approximation line and an entirely different picture emerges -- current margin debt is not outrageously high. It may even be a bit lower than the historical trend.


(Click on image to enlarge.)

Even this graph may be making margin debt levels appear more worrisome than they are. In 1987 at the time of the crash margin debt was 68% greater than the historical trend.  In June of 2000 margin reached 130% above trend! And in 2007 margin debt was 67% above trend.  Today, in sharp contrast, margin debt is about 3% BELOW trend.

There are countless things about investing that might be worth fretting. But, today's level of margin debt doesn't deserve to be very high on the list of worries. In a couple of years margin debt levels may be worth your attention.