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.)
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