Markets are hard to predict but economics give insight to the future direction of the stock market.
Update: The market has not crashed yet because the Fed keeps pumping money and might do so until after the 2020 election. It is political.
- macroeconomic data
- moving averages or trends analysis
I am getting a Ph.D. in Economics and I am partial to economic influences on the market. It would be irresponsible of me to claim I know the direction of the market, because I do not, however, I have some clues.
My tip is, do not listen to subjective information reported on the news, look at the macroeconomic data for the economy as a whole. The stock market is a leading indicator. It reflects the general future trend in the economy.
What you can trust – Economics and Interest rates
What you can trust is macroeconomic data which in the long-run will be accurate. For example, the stock market will not perform when GDP growth rates are moving down, and real interest rates are movirfng up.
The macro indicator I trust the most is the interest rate. More precisely the relationship between what is known as the natural rate of interest or the marginal productivity of capital in a moniless economy and the observed bank rate.
Federal Reserve econometric models try to estimate the natural rate of interest to determine its relation to the observable rate nominal rate of interest.
The data and the theory behind economic and stock market movements
- For a more precise analysis of current econometric estimate look at Federal Reserve data and their of the natural rate of intrest.
- Federal Reserve data on interest rates and the economy
- To understand the theory behind interest rates, the economy and ultimately the stock market refer to Austrian business cycle theory.
- Business cycles and the Interest rate
When there is a disequilibrium in the money market govern by the relationship between the market and natural rate, this will create shocks in the real sector. The stock market is forward-looking and will try to anticipate this with a movement downward.
Practical stock market tip
Without getting technical, for practical applications for you, try simply to watch the interest rates set by the central bank. Analysis is in relation to the general health of the economy. What the trend and Do you think the moves by the Federal reserve are prudent to temper inflation or regardless do interest rate increases slow the
Stock market crash predictions
The following is a list of reasons the stock market, a leading economic indicator could decline. The caveat being when this will be, today or in five years. The stock market is a good crystal ball for the economy because expectations are the driver. Therefore, if the economy is expected to slow, then movements in the equity market follow.
- Interest rates – the biggest driver of the economy. Interest rates are the price of loanable funds and consumer spending. Real Interest rates are increasing. Bank observed rates are not in line with the natural rate of interest. If the Federal Reserve interest rate increases continue the market will decline. We can stop here if we wanted to. It is almost that simple. I do not know the correlation studies to validate this hypothesis but this is what theory tells us.
- Political uncertainty – The country is divided so the political change is slow. Therefore they cannot address the real issue of the Federal Debt.
- Unstatinable debt – Federal, State, and private debt is growing. The result is government debt crowds out private investment. Further, there is a question if interest on the debt can be paid in the future.
- Inflation – Not the official CPI or PPI, things you see at the grocery store or at work, I am referring to real estate and the stock market. Prices in the real estate market and stock market have inordinately increased to levels that might not collate to natural value or historic conservative levels.
- Stock valuations are high – It depends what numbers you are looking at but according to Robert Shiller, price compared to cyclically adjusted earnings than 16, this means this the market is overvalued.
- Monetary policy is ineffective – The Federal Reserve have used its tools to stimulate the economy and is out of . Monetary stimulus is like pushing against the wind.
- Fiscal policy is ineffective – The bulwark of fiscal stimulus is at a point now where the benefit of a is less because of the effect on real interest rates.
- Ask yourself do you create anything – I do not know if I know too many Americans involved in the creation process, but rather moving paper and working on the computer. If Americans are pressing each other pants in a service economy, this is not a good sign. The US does create, it creates pharmaceuticals, defense-related and software. Only the last can be argued to add real value
Here is the reality about the direction of the market. Noone knows. Do not take counsel of your fears. Invest in a disciplined objective rational way. If you dollar cost average and invest for the long term you mitigate much of the risk.
You need to be objective and not emotional about your investment strategy.
The solution to stock market crash predictions
- Follow interest rates, the market moves inversely to real interest rates – When rates trend up in relation to the natural rate of interest, you could move into more conservative investments.
- Dollar cost average in and out of the market – Trust that the market is a positive sum game if you invest for the long-run and avoid sudden undiversified movements in and out unless you a professional trader with AI backing your investment tactics.
- Use a very good quantitative screen on your equities picks – I have mentioned valuengine.com and moneycentral.msn.com top ten picks many times. The reason is if your individual picks are good they will fall less if a crash comes and bounce back faster on the uptick.
- Use a simple moving average to give you signals to exit the market – Moving averages are not a science but a general guide. They have gotten me out of major downturns like in 2007 and given me the green light to get back in. Consider using something like a 12 month moving average on the S&P. It is a very broad technical indicator.
- There is always more risk being out of the market than in – Whether market returns luck or skill, if you are in the market and have a plan for investing, a disciplined system, in the long run, you will make money because the market in a growing economy is a positive sum game.
- Global markets and counter-cyclical markets – Markets move in tandem, however, some are countercyclical, research these markets.
Ask me if you have questions, I can not give investment advice but I can tell you from the perspective of an economist, what might happen based on my subjective personal observations.