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Current and Historical S&P500 Economic Forecasting Model Predictions

May 15, 2019

In the last post we introduced the S&P500 Economic Forecasting Model which seeks to predict the chances of a moderate or large drawdown over the next 90 days. The model considers a large range of different macroeconomic variables and their derivatives to assess the likelihood of a given event. What the model can do is identify when there are signs of economic weakness that may or may not be reflected in the current market price. What the model cannot do is identify sentiment, liquidity, or news driven corrections (ie the Donald Trump effect). Currently the model is waiting on several new pieces of data before making a new prediction. The table below shows the model predictions using “point-in-time” data as of the first day of the respective month. Here is the current and historical output:

The most recent prediction which was made as of the beginning of March shows that the model does not expect a moderate to large correction through the end of May. The direction of the market is expected to be sideways or flat. So from a macroeconomic perspective it seems as if the economy is healthy for the time being. Absent any major news events or tweets and the economy is likely to keep chugging along and the stock market will probably remain in a trading range before climbing higher. If you look at the historical predictions they have been fairly accurate in recent times and provide some guidance of when it might be worthwhile buying on weakness (during December 2018) by looking at both the chance of a drawdown and the predicted market direction. While the model was created without running backtests, we will show some applications of using the signals for timing the S&P500.

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