Will The Market Simply Stagnate?
At the present moment it’s a screaming match.
Bulls believe that President Trump will deliver on his phenomenal tax cuts, earnings will surge and the stock market will follow.
Bears are too eager to point out that the stock market is selling at insane valuation levels and that Trump’s tax plan is likely to fail in all of its “phenomenal” form.
Who is right?
Perhaps no one…..
CHAPEL HILL, N.C. (MarketWatch) — The U.S. stock market will be trading right where it is today in six months’ time — at 2,370 on the S&P 500 Index.
That’s the latest six-month forecast from Sam Eisenstadt, whose short-term stock-market-timing model is the best I’ve seen in my four decades of monitoring the investment-advisory industry.
Eisenstadt, for those of you who don’t know who he is, is the former research director at Value Line Inc. Though he retired in 2009 after 63 years at that firm, he continues to update and refine a complex econometric model that generates six-month forecasts for the broader U.S. market. He includes in his model all factors he has found to have an ability to project the market’s subsequent six-month return.
Consider his forecast from six months ago, one of his best ever. After the close of the last trading day in August, Eisenstadt emailed me to say his model was forecasting that, at the end of February 2017, the S&P 500 SPX, -0.33% would be trading at 2,370, but possibly as high as 2,400. At the time, the benchmark index was trading at 2,171, so his forecast was for a six-month increase of between 9.2% and 10.5%.
As it turned out, the S&P 500 closed at 2,363 on Feb. 28 and the very next trading day, March 1, it rose intra-day to 2400.98. In the messy world of stock-market forecasting, you don’t get closer to a forecast than that.
Making Eisenstadt’s success even more remarkable was that his August forecast was issued before the presidential election. How many of you would have predicted a 10% six-month rally if you somehow knew that Donald Trump would win the election?
It’s worth noting, however, that Eisenstadt’s model does not depend on any guesswork on his part about the future, either political or economic. Its inputs are entirely quantitative factors that are known at the time the forecast is made. Though it has not always been as accurate as it has been over the past six months, it has an enviable track record. (See chart.)
Because Eisenstadt’s model is proprietary, it’s impossible to know which factors are causing the model to issue a forecast that is so much less bullish than six months ago. But, in an interview, Eisenstadt told me that one of the bigger culprits is higher interest rates.
Note carefully that Eisenstadt’s model doesn’t forecast the path the market will take over the next six months. So there is more than one way for the market to live up to the forecast. It could be that stocks rise in a final blow-off to much higher levels in the next couple of months, for example, only to give it all back by the end of the summer. Or it could be that equities remain in a tight trading range for the next six months.
Regardless, if we take Eisenstadt’s track record seriously, his latest forecast suggests that the next six months will be nothing like what we’ve experienced over the past six.
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