6 Month Stock Market Forecast December thru May, 2018: 3% (somewhat below average)
Probability of at least Breaking Even: 0.94 (decidedly above average)
Parents of young kids know the dark humor of the classic poem Night Before Christmas. The line 'while visions of sugar-plums danced in their heads' sounds innocent and happy, but every parent knows that a real sugar high ends with the kid crashing fairly soon into an emotional wreck. It is never a question of "if", just a question of "when" the child's blood sugars will drop and things turn dreadful for everyone.
It looks like the stock market is on the cusp of excessive optimism. That never ends well. The guys behind the counter at my local UPS store were really excited about investing in BitCoins. Not good.
We will probably enjoy perhaps a year of continuing strong stock market returns. My models say December should be excellent for the market and the following 5 months through May, 2018 should be OK, but not great.
However, the pieces are now in place for the next stock market crash. It won't be soon, but it is now rather certain. The great bull market it coming to an end. Don't hold your breath. As I just wrote, it probably won't happen soon. Hopefully my econometric models will give us plenty of warning.
As of today, it looks like the Republican Party's tax plan will be enacted in some form. Much is unclear, but it is probably a sweet sugar-plum treat for many corporations and probably has not been fully priced into the stock market. Here comes a stronger sugar high, but the market has already been jazzed up on good news.
The economy is performing as good as can be expected. Literally. The Congressional Budget Office, of course, is responsible for 'scoring' the costs and benefits of proposed legislation. Many years ago as part of their scoring calculations CBO came up with a remarkably accurate performance model for the U.S. economy. Here is a link to the long term CBO plot of that model going out to 2027. The good news is that Real Gross Domestic Product has finally risen to the actual level of Real Potential U.S. GDP. The economy is actually doing quite well overall despite flat growth of wages and localized real problems in the Rust Belt and inner cities. Real GDP may well go for years a bit over Potential GDP. But, there is comparatively little upside room. Possible GDP losses are now many times the level of near term potential gains.
Should the tax plan significantly spark the economy the Federal Reserve will almost certainly raise interest rates at a faster speed than their current course. The Fed can, and will slow the economy to remove froth. Unfortunately, for the past half century the Federal Reserve has not been able to bring the economy in for a "safe landing". Sudden crashes are the norm.
Finally, the Leading Index for the U.S. economy as posted on the Federal Reserve data website has decidedly turned down. Every time the fall has reached today's level, the U.S. has gone into recession within a couple of years.
So, enjoy the good times while you can. But, start preparing yourself for the letdown after the sugar high wears off.
Seasons Greetings.
(Click on image to enlarge.)
