Stock Market Forecast January 2016 through June 2016: Above average gains

January 2016:  U.S. stock market returns well above average
February 2016: U.S. stock market returns well above average
January 2016 through June 2016: Above average gains (roughly 7%, 80% chance for break even)

I have more-than-normal confidence in this month's forecast. My short term (1 to 2 month) stock market forecasting models have been anticipating the timing of market shifts pretty well for the past couple of years. The most recent call for a change in market direction (Buy) was made at the end of August.  The forecast was matched by a market turn around starting in September that now has produced a gain of roughly 7%.  

Looking forward, the short term models remain quite bullish for the first months of 2016. While my longer term models are already starting to worry a bit about market slow downs in May and June, the short term models are optimistic.

The buy/hold calls of the short term model (green) and the sell/avoid calls(red) for the past two years are shown in the chart below.  The model  turned green at the start of September and the market has risen about 7% since then. For January the model remains bullish. It suggests "Buy/Hold".

(Click on image to enlarge.)

Let's shift to the longer 6 month forecast.  For the past year or so the stock market generally has been following the same course that my 6 month macro economic models had predicted six months months in advance.  On the whole, however, the stock market has come in somewhat below my econometric models' expectations. Last July, for example, the model expected below average gains for the second half of 2015, but the actual result in the 6 months since then was significantly worse, a loss of about 7%.  I am not too concerned about this difference -- as you can see in the chart below, it is more the rule rather than the exception that actual market performance is more extreme than my models had predicted.

(Click on image to enlarge)

Happy New Year!

Stock Market Forecast December, 2015 through May, 2016: Very nice

Summary:
Current prospects for the U.S. stock market are very good: 9% gain over the next 6 months with an 85% probability the the stock market will at least break even.  Immediate prospects are fine (more on this later.)  Maybe the whole world will blow up next week. I don't know. But, based on roughly 40 years of stock market history, conditions for the U.S. stock market are likely to be favorable.

So, this is a pretty nice forecast-- not as good as the fantastic forecasts that came with recovery from the Great Recession -- but, still really good compared to long term averages and somewhat typical of this time of year. For this year, this is probably as good as it gets.

Enjoy your holidays and be nice to other people! I love both of my readers and wish them well in the coming year!

Detail:
There is a graph below that, I hope, will become a regular part of this monthly blog. It shows day-to-day prospects for the stock market in the near future. (Please regard this graph of near term stock market prospects with some suspicion.  This is new stuff. The formulas need to prove themselves over time. Be careful with your money. )

Hopefully, what you will see going forward with future months of the graph is:  Two months, or more, before a 'significant' market trauma, a yellow marker should start to appear.  Then, (hopefully) a month or more before a market stumble, a red flag should start waving. There will also be an indication of how bad the next market tumble is expected to be.  The picture moves slowly so you shouldn't need to hold your breath.

At least, that is how the scenario for this near term forecast graph played out this past summer. And, that is what our back-tests showed to often occur.

How can the chart 'predict' the future months of stock market behavior ahead of the fact? The answer is easy.  The model is simplistic. The model is almost exclusively based on a small number of long term economic fundamentals. It takes time for the gigantic world economy to actually show the results of either world events or government policy actions. But, investors are on their own time schedules. Historically, investors do not react initially to the full import of new developments in the real world.  Sure, there is a stock market blip to match every news event -- but that is not the 'considered' view of millions of investors. Overall, investors tend to wait  for confirmation in 'numbers' coming from the real world (with a reporting time delay)  to see what is going to happen next.  So, typically, investors react late, and they all react together -- resulting in a sharp crash or some other market perturbation.  The model, on the other hand, being too 'stupid 'to listen to stock market pundits or ponder over either astrology or 'technical analysis', assumes that what is "probably going to happen" actually will happen, and happen when it typically happens  And, surprise!  The typical result usually does happen just about as it usually does.

What the chart, hopefully, shows is that in the past summer a fairly small correction was expected, and that is what occurred. There was plenty of notice for those following this chart. Right now, things look pretty good.

(Click on image to enlarge.)

So, let's turn to what is likely to happen to the market in the next six months. Here is what is coming up. The models' 6-month U.S. stock market forecast: (much better than average)
U.S. Stock Market Forecast (Value Line Arithmetic Index):
Probable stock market gain 12/1/2015 to 6/1/2016: 9% (Avg. 6 mo. gain since 1984: 4.8%)
Probability of at least breaking even : around 85%  (Average for all months since 1984: 73%


My reason for writing this blog is to track how well my econometric stock market models actually perform. (It has been about 8 years so far. At the start I was considered to be crazy, but now that case isn't so clear.)

So, how have the models' forecasts been matching reality in the past half year? Judging from the graph below, it appears that the forecasts this year have basically been on-track.  The forecasts from December through May, had been for a weak first half of 2015. Well, the market did weaken, but  the market fell more than the models had forecast.  Look at the graph below and you will see that this happens frequently -- the models expect seasonal weakness, but, to compensate mathematically for those infrequent years with super summer performance, the models dial back their average forecasts.
Here is the lesson: as a rule, the market will usually perform worse than the models negative forecasts and will perform better than the models positive forecasts. At least, that is the way I see the graph below.

(Click on image to enlarge.)

Stock market trading based on 6 month stock market forecasts - So what?

Why pay any attention to the stock market forecasts from this forecasting model? It looks like a buy/sell strategy may significantly boost investing returns.

In my last post I introduced a stock market trading strategy based on my 6 month market forecasts. It turns out that the forecasts consistently lead the market by a couple of months, so actual trading works best not by following the most current forecast, but by using a lagged forecast that weights forecasts from a few prior months.  The buy/sell periods called by that strategy are shown in the plot at the end of this piece. That plot shows the strategy produced just a handful of handful of buy/sell points in the period since mid-2007 when I started posting forecasts for my models.

So what?  A few correct buy/sell decisions can have a huge impact on investing returns. In particular, the forecasts of 2008 through early 2009 screamed of likely 6 month market losses of  17%  or more, months before the crash took place.  They turned out to be right. They were worth paying attention to.

A back-test applying the buy/sell strategy to an S&P 500 index fund is shown below running from mid-2007 to the present.  In the stock crash of 2007-2009 the S&P 500 took a big hit, but overall for the period the average has had a 4% annualized rate of growth. The strategy using the 6 month stock market forecasts, however, had an annualized growth rate of 14%, roughly 3 times better.

(Click on image to enlarge.)

The big market call of major likely declines made for most of the difference in performance.  Since the bottom of the financial meltdown the strategy has had only a few brief sell periods. So, for mid 2009 to the present the S&P 500 index has had a great rise and has only slightly under-performed the strategy.

The chart below shows the buy/sell calls produced by a strategy based on using a weighted average of 6-month market forecasts.

(Click on image to enlarge.)

Stock market trading based on 6 month stock market forecasts

I am adding a stock market trading strategy to my monthly blog posts, a Buy-Sell-Hold  model for the U.S. stock market based on a weighted average of my forecasts from prior months.

From the start, there has been a problem making use of my six month stock market forecasts:  what's going to happen in the stock market six months from now has very little correlation with what the market is going to do in the next few days and weeks. (Just because I know it is going to get hot next summer, that's not much help in knowing whether I need to wear a coat outside in mid-November.)

The solution I have come up with is to develop a stock market trading strategy based on a statistically weighted average of my 6 month stock market forecasts from prior months, not the current prediction.

Below there is a plot of the Buy/Sell calls from the model for the S&P 500 index over the past several years.  Most of the time the strategy yields a clear Buy/Sell opinion, but there are a few spans of time when the model had no real opinion.

(Click on image to enlarge.)

Stock Market Forecast November, 2015 through April, 2016: Buoyant

Stock market prospects for the next 6 months are strong. There is about a 90% probability that the market will go up.

The stock market forecasting models documented here are based on the premise that the broad U.S. stock market tends to do approximately what it usually tends to do. Over a forecasting horizon of six months the market will respond to the same real economic factors that have moved prices over the past several decades. Shocking, right?

In late August through September the stock market was panicked by fears of things that don't have large real dollars and cents impact on the U.S. economy (financial uncertainty in China and Greece along with weak world oil prices).  My models had expected typical seasonal market weakness, but not the extra downdraft of international finance fears.  Then, just like the not-at-all-real goblins of Halloween, in October those extreme fears fell away and the market staged a sharp recovery.

Over the long haul my experience-based stock market forecasting results tend to be pretty good. Or, at least they have proven to be fairly accurate since 2007 when I started publishing forecasts in real time.

Here is my 6-month forecast:
U.S. Stock Market Forecast (Value Line Arithmetic Index):
Probable stock market gain 11/1/2015 to 5/1/2016: 11% (Avg. 6 mo. gain since 1984: 4.8%)
Probability of at least breaking even : ~90%  (Average for all months since 1984: 73%

Here is the track record of my 6 month stock market forecasts since 2007:

(Click on image to enlarge.)

Stock Market Forecast October, 2015 through March, 2016: Bouncing back

Last month the title for my stock market forecasting entry was also "Bouncing Back" and that was certainly not the case for the lousy stock market September we just got through!

But, this blog and my stock market prediction models focus on the coming six months, not the next few weeks.  Take a look at the stock market performance versus prediction graph below.  The model had been expecting seasonal weakness for the late summer and that is what occurred, just worse than forecast.   If my macroeconomic model is to be believed, it says that the market is over reacting to international news and things should start to get better over the next few months.

(Click on image to enlarge.)

So here is my 6-month forecast:
U.S. Stock Market Forecast (Value Line Arithmetic Index):
Probable stock market gain 10/1/2015 to 4/1/2016: 10% (Avg. 6 mo. gain since 1984: 4.8%)
Probability of at least breaking even : 85%  to 90%  (Average for all months since 1984: 73%

Stock Market Forecast September, 2015 through February, 2016: Bouncing back

My econometric stock market models are predicting a significant stock market recovery of about 10% over the coming 6 fall and winter months of 2015-2016. That bounce is despite, or more accurately, because my models had not expected the market to tank so badly during August.

Huh?

My forecasting models totally missed expecting the mid-August market panic / correction. The prediction models had been expecting a sub-par market over the summer months, reflecting the statistical fact that stock markets tend to be weak over the summer. But, no way did the models foresee the abrupt market correction that actually, and painfully, happened.

So, how is that useful information?  The answer is that the fears that moved the market (high valuations, economic weakness in China, low commodity prices, and a weak oil market) are not the basic economic forces that typically have a lasting and remarkably predictable longer term impact on U.S. stock prices. In short, the models say that the market over-reacted to bad news that really is not that important to U.S. stock prices. If history is a guide, the positive economic fundamentals will regain their importance fairly soon and the market will recover.

Morningstar.com agrees. Their Market Fair Value graph, based on net present value calculations today says that the overall market is 7% undervalued. Stocks are on a 7% off sale! (I remain convinced that this Morningstar graph is the most useful stock market indicator available for free on the web.)

So here is my 6-month forecast:
U.S. Stock Market Forecast (Value Line Arithmetic Index):
Probable stock market gain 9/1/2015 to 3/1/2015: 10% (Avg. 6 mo. gain since 1984: 4.8%)
Probability of at least breaking even : 85%  to 90%  (Average for all months since 1984: 73%

Stock Market Forecast August, 2015 through February, 2016: A bit better

I love a boring summer stock market.  Nothing much seems to be happening.  We in the U.S. are in the middle of the typically weak summer period. So,looking forward towards winter when the market typically had recovered, 6 month stock market performance will probably be a little better than average.

Here is what my econometric models are predicting:
U.S. Stock Market Forecast (Value Line Arithmetic Index):
Probable stock market gain 8/1/2015 to 2/1/2015: 6% (Avg. 6 mo. gain since 1984: 4.8%)
Probability of at least breaking even : ~ 80%   (Average for all months since 1984: 73%

So, why is a boring stock market wonderful?  Because the market is unlikely to crash really soon. Some things in life are very simple.

If all things happen as they 'typically' do in the economy, my personal bet is that the market will have its next serious upset in a couple/few years. (My mathematical models have no opinion on this -- they only look 6 months ahead.)

Here is how the the predictions of my forecasting models and actual performance of the stock market have landed over the past 8 years:

(Click on image to enlarge.)

As shown in the chart above, the U.S. stock market (measured by the ValueLine Arithmetic Index) has done pretty much what my models had expected for the past year or so. Actually, my forecasts have matched the market unusually well.  Since the models are based directly on what the market usually does in response to macro economic factors, this probably means that no really major strange outside factors are driving the market.

The great protective shield of historically low interest rates that has been maintained by the U,S, Federal Reserve Bank has made this huge bull market happen.  It is pretty easy for businesses to make money when they can borrow money for next to nothing. In a few years the current odds are that the U.S. economy will have become frothy. That's when the Fed will jack rates up rapidly and 'take the punch bowl away from the party'.  But, that's what is likely to happen in a few years -- not now.  Enjoy summer!

Stock Market Forecast July, 2015 through January, 2016: Average

The first half of 2015 saw the U.S. stock market bounce around, but end up just about where it was at the start of the year.  Performance had been very close to our models' projections until this past week when concerns over the Greek debt crisis caused markets world wide to stumble.

Our models predict that the second half should start to get better toward the end of the year, but still fall a bit below normal performance.  As far as the model is concerned, it is anticipating normal summer weakness in the course of a maturing -- and slow growing -- bull market. Not much reason to either sell or buy.

U.S. Stock Market Forecast (Value Line Arithmetic Index):
Probable stock market gain 7/1/2015 to 1/1/2015: 4% (Avg. 6 mo. gain since 1984: 4.8%)
Probability of at least breaking even : ~ 70%   (Average for all months since 1984: 73%

(Click on image to enlarge.)

Looking at the graph above, for the past several months our models have predicted weakening market results.  The market in real time appears to be flagging faster than expected.  For the 6-month period just completed, our forecast have been for roughly a 5% gain.  As of last week the market had logged a 4% gain.  But, thanks to fears brought on by Greek sovereign default, the actual  six month result was no gain or loss.  Looking at prior years on the chart, when the market falls faster than predicted it also tends to stay weaker then anticipated for several months.  Because of the uncertainty of pending debt default in Greece and Puerto Rico, it wouldn't be surprising to see more market weakness in the next few weeks. A steep enough tumble might open up a buying opportunity.

Update on the Next Stock Market Crash

I have updated the page that follows a few slow moving indicators that are likely to point to the next stock market crash that will eventually come. Here is a quick summary.

The long term stock market indicators are less favorable than at the start of the year, but don't point to a stock market collapse in the near future. According to them, the next market disaster still could be a couple of years away.

• Margin Debt High? Margin borrowing is rising, but levels are still below the historical trend..
• GDP vs Potential GDP? The economy remains relatively weak, a good sign
• Sharply higher interest rates? Rates are still near historic lows.
• U.S. Leading Index Crashing?  Weaker.  The drop in the index has not been enough to point to recession, but it is enough to worry about.
• Market Reverting to the Mean? The overall market is near its long term trend making major near term gains unlikely. However, a crash reverting to or below the mean is still unlikely.
• Merger & Acquisition Activity Peaking?  Worth a worry or two.  M&A activity is climbing rapidly, pointing to a developing bubble. The question is just when it will eventually pop. There is no reason to expect it will be right away.

Stock Market Forecast June to December 2015: Flat

Just like last month, my models are predicting no net gain for the U.S. stock market for the coming six months.  It's  roughly 50/50 whether the market can break even.   The forecast isn't bad enough to make it worthwhile to sell stocks, and it isn't good enough to suggest buying much.  Overall, your time is probably better spent at the beach for the next few months rather than thinking much about stocks.

All of the quick and easy gains in this bull market have been tapped.  Any further market increases  need climbing corporate profits.  But, bigger profits are hard to come by as the real economy remains lackluster despite interest rates that are incredibly low by historical standards. When interest rates eventually increase, new profits will be even more difficult to find.


U.S. Stock Market Forecast (Value Line Arithmetic Index):
Probable stock market gain 6/1/2015 to 12/1/2015: 0% (Avg. 6 mo. gain since 1984: 4.8%)
Probability of at least breaking even : ~ 56%   (Average for all months since 1984: 73%

(Click on image to enlarge)

For the past year or so the market and my models have matched rather closely.  For the past 6 months the model had expected nearly an 8% gain and over the period the market actually gained 5.3%.  This gives some comfort that the market is behaving in a thoroughly normal way and is not under the domination or some sort of lurking Black Swan.

Stock Market Forecast: Weak 2nd Half for 2015

Think flat.

Most probably the U.S. stock market will end 2015 just about where it is now, or a shade worse.  The odds of at least breaking even in the market are middling, a little below average. The stock market has performed near the predictions of my 6 month forecasting models for the last couple of years -- meaning that no major unexpected forces appear to be moving prices. Therefore, the model predictions for the next six months are probably credible.

U.S. Stock Market Forecast (Value Line Arithmetic Index):
Probable stock market gain 5/1/2015 to 11/1/2015: 0% (Avg. 6 mo. gain since 1984: 4.8%)
Probability of at least breaking even : ~ 60%   (Average for all months since 1984: 73%

Normal seasonality has a role in the weak forecast, but the gradual weakening of the bull market that has run since early 2009 is the dominant market factor now.  The graph below from StockCharts.com compares the relative performance of the S&P 500 (IVV) to 7-10 year Treasury Bonds (IEF) since the start of  2013.  The story is simple: stocks have performed much better than bonds, but stocks seem to be running out of steam.

(Click on image to enlarge)
Link to chart

As shown in the chart below, our market forecasts have been weakening over several months.

For the most recent 6 month period, the market gained about 9 % while our model expected roughly 7% gains. Close enough.

Test posting

Hi,

There may be a problem with Google emailing copies of my Six Month Stock Market Forecast posts.  This post is just a test to see if their system is working.

You probably missed my post for April -- basically an expectation of positive, but below average gains for the coming 6 months.

Thanks for your patience.

Tom

April 2015 -- Below Average Stock Market Gains Coming

Following its normal pattern, the stock market had above average gains over the first part of the winter. Sadly, the stock market probably will have below-average gains over the next 6 months. Not horrible, just weak.

The chart below shows that for the past year or so the U.S. stock market has been tracking our forecasts rather closely.  In the last 6 month period, for example, the market rose 9.4% and our models had predicted an 8% rise -- close.

The fairly close match between our forecasts and the stock market is not much of a surprise. After all, the models are based statistically on how the stock market has responded to a number of key macroeconomic factors over the past 30 years. And, that is good news -- the market is responding normally to basic economic conditions. (measured based on the Value Line Arithmetic Index.) Nothing really unusual seems to be going on.

What's up in the next half year? Mild disappointment. Sorry, the market is now fairly pricey and statistically the summer months yield somewhat lower gains than the colder months.

U.S. Stock Market Forecast (Value Line Arithmetic Index):
Probable stock market gain 4/1/2015 to 10/1/2015: 3% (Avg. 6 mo. gain since 1984: 4.8%)
Probability of at least breaking even : 60% to 70%  (Average for all months since 1984: 73%

(Click on image to enlarge.)

Falling Margin Debt: Good or Bad Sign for the Stock Market?

Total Margin debt as reported monthly by the the New York Stock Exchange has fallen about 4% over the past 7 months.  Depending on how you want to look at the long term record, this could be a very bad omen, a pretty good one, or just a non-event.  I tend to see it as probably a positive sign, but nothing of immediate importance.

Margin debt is money that investors borrow from their brokers at fairly high interest rates in order to buy more stock than they otherwise could. As such it is a good indication of investor enthusiasm.  In a stock boom speculators buy all the stock they can and total margin debt shoots up. In a bear market those same speculators sell out in panic, the brokers get paid back, and margin debt levels plummet. Falling margin debt shows a drop in investor enthusiasm and optimism so it is hard to regard it as bullish.

Here's the scary view reported by Mark Hulbert at MarketWatch.com as a wake-up call on the bull market.   Since 2000, every time the level of margin debt has dropped below its 12 month moving average the stock market has been in a bear market. With the newly released January data, margin debt is now below the 12 month average -- and so that must be very bad news.  Right?

Taking the opposite view, the drop in margin debt may well be a very healthy sign for a continuing bull market.

Looking at the NYSE data going back to 1970 margin debt has shown an amazingly steady rate of growth.  Comparing actual margin debt to a constant rate of growth yields a pretty close fit. (Rsquared = 0.96)  That is not much of a surprise as the overall economy and the stock market have also had relatively steady long term growth. We all tend to focus on all the ups and downs, but overall the bumps of the economy and the stock market are dwarfed by long term, multi-decade growth trends. The same is true of the growth of total margin debt over time.

The graph below shows detrended margin debt over time -- relatively how much actual margin is above or below its historical growth pattern. The graph pattern is clear: in a boom the relative level of margin borrowing shoots up, perhaps 50% or more above the historic trend. Then the bubble pops and margin debt collapses even more quickly during any sort of market crash.  The dates of the margin spikes match the start of the most significant market disturbances over the past several decades.  The warning sign is clear -- when the relative level of margin debt shoots up to  roughly 50% above trend a market bubble is due to implode.

But what about now?  Margin debt has been growing in fits and starts since the catastrophic bottom of early 2009.  The rise doesn't resemble any sort of spike and is still well below its long term trend.   Rather than pointing to an imminent bear market, this chart of margin debt appears to indicate that the market is far from being in the middle of a speculative bubble. If history is to play out in a typical way, it may well be a few years before a speculative bubble shapes up.  If it does, the slow moving growth of margin debt should scream our a warning when it spikes up.

March, 2015 U.S. Stock Market Forecast

U.S. Market Forecast (Value Line Arithmetic Index):
Probable stock market gain 3/1/2015 to 9/1/2015: 3.5% (Avg. 6 mo. gain since 1984: 4.8%)
Probability of at least breaking even : 73%  (Average for all months since 1984: 73%

Coming off a strong 5% gain during February, the prospects for further stock market gains over the next half year are subdued: positive, but below average price gain of 3% to 4% and average probability  (73%) of at least breaking even. Looking at the progress graph below, the model would expect gains to continue for a few months followed by a bit of weakness during the summer months as is typically the case.

(Click on image to enlarge.)

The model has been anticipating the stock market pretty closely for the past year or so.  In the last completed 6 month period the model had predicted a gain of roughly approximately 6% and the actual gain turned out to be about 4%. Close enough.

The overall U.S. stock market situation has stayed roughly the same for a couple of years:

• U.S. stocks generally are somewhat over-priced.
• Historically low interest rates, however, prop up these high stock prices.
• Further real economic growth is necessary before stocks can rise much.
• Room for growth remains as the economy is still performing below its long term potential.
• Based on the amount of outstanding margin debt and continuing economic recovery a price bubble does not appear to exist.
• In the near term international economic disruptions do not seem likely to severely damage the U.S. economy. (e.g. Greek debt questions, low oil prices possibly unbalancing several countries)

Taking all of this into account, a major stock market decline does not appear to be likely for at least a year or so.

February, 2015 Six Month U.S. Stock Market Forecast

2015 has gotten off to a weak and volatile start with the S&P 500 off about 3% during January. Volatility is back -- the market has fallen and worked at recovering 4 times in just this first month. Despite this weakness, the macroeconomic mathematical models reported on here expect slightly better than average market gains for the next 6 months.

U.S. Market Forecast (based on the Value Line Arithmetic Index):
Probable stock market gain 2/1/2015 to 8/1/2015:  7%  (Avg. 6 months gain since 1984: 4.8%)
Probability of at least breaking even : 80%  (Average for all months since 1984: 73%)

The U.S. stock market has tapped nearly all of the quick gains that came with recovery from the Great Recession.  From here on the gains are likely to be about average and depend on solid gains in the real economy.  With the scale of probable gains getting smaller the relative importance of market volatility grows.  Translation: Look for a very bumpy ride with fairly low pay-off.

Keeping track of how well these models are performing, over the past 6 months the market (using the Value Line Arithmetic Index) gained 3.5% while the prediction had been for roughly a 7% gain.  I'll call that a win: the model expected relatively modest market gains and that is what occurred.  The models used here are not expected to be highly accurate.  Their sole purpose is to give early notice of major market gains or losses, hopefully several months in advance.  Time will tell if the models can do that.