Tags: stock market | national debt | gdp

How to Predict the Stock Market

How to Predict the Stock Market

Tuesday, 02 April 2019 12:35 PM Current | Bio | Archive

This is a question on the mind of most stock holders. People consider this more of an art than a science.

Despite the various computer models being employed to predict what the market will be doing, it is still harder to forecast what the market will be doing than to predict the weather.

However, there is a way if you follow my own simple method:

Watching economic trends for some fifty years, I found that there is a close correlation between the increase in our national debt, now standing at about 25 trillion dollars, and the Dow Jones Industrial averages (DJIA) even though the increase in the DOW is less that of the debt, which indicates that a portion of the debt increase is seeing other “productive” use in the economy.

If you don’t believe me, consider this:

In a fairly normal time span, during which the U.S. had no major wars (which tend to greatly inflate our national debt) I found the following correlations: Between the years 2011 and 2018, the U.S. national debt increased by 299 percent, followed by the DJI of plus 227 percent, a difference of about 25 percent. “Cause and effect” indeed.

Looking further back, between the years 1960 and 2000, the U.S. debt increased 1,980 percent compared to an increase of the Dow Jones Industrial by 1,530 percent, again a difference of about 23 percent less for the Dow. Write the difference up as inflation.

Consider too what happened between the first quarter of 2018 and the same period in 2019. The January 2018 Income Tax reduction caused a significant increase in the U.S. debt during this period by about 22 percent. During the same period, the Dow Jones Index increased by 23 percent. Here the percentages are about equal due to timing problems. People purchase stocks ahead of the actual tax savings, while the deficit only got recorded later at the time the IRS received fewer paid taxes.

Why should this correlation between debt increase and stock market happen?

Consider the national debt akin to credit card debt. When a consumer purchases goods with his or her credit cart, the person increased his or her debt. At the same time, the purchase of goods contributes to the national economy. Sort of a zero sum game as long as the consumer repays the bank for the debt.

The same happens when the government increases the national debt* by over-spending. The money goes mostly back into the economy, a good percentage of which then goes into the stock market as can be seen from the above statistics. The lesson here is, government debts are good for stocks, on the other hand, a frugal government is bad for the market.

Now back to my prognosis, here is what you should do:

Check on the web by how much the national debt has increased during the past 6 months. You now can expect the U.S. Stock market to follow at about the same average rate (allowing about a 25 percent discount of the percentage of debt increase) during the next six months (excepting recessions which causes a time lag). For example let’s say the U.S. national debt increased by 3 percent during the past six months, you may expect the stock market to increase about 3- (3-25 percent of 3) = 2.25 percent (excepting the occurrence of a major economic crisis). My predictions are only long term averages discounting daily or weekly fluctuations.

Even some economists and pundits now agree with my prediction of 4 years ago, that economies will settle for a pretty constant economic growth averaging at 2 percent of GDP (partly fueled by population increases). This means that except for “hot” stocks, company earnings will remain pretty flat and selection of individual stocks will be no longer based on “growth,” but on dividends.

The low GDP increase is a sign that supply and demand in our economy are well balanced. This is good news then when that happens there will be no recessions nor inflation.

DISCLAIMER: The above method should not be taken as a recommendation to buy or sell stocks since I am not a licensed professional advisor.

*Even though a good deal of the U.S. national debt consists of trading deficits with foreign countries, this part of the deficit reflects nothing more than unpaid imported goods, all added to and used in our economy.

Hans Baumann is a licensed engineer in four states and a member of Sigma Xi, the Scientific Research Society. He is an adviser to the dean of the University of New Hampshire Business School. Dr. Baumann has published manuals on valves and was a contributor to many works including the "Instrument Engineers' Handbook" and the "Control Valves Handbook." He has also published several books on business management and German history, including "Hitler's Escape," which suggests that Adolf Hitler did not commit suicide and survived World War II. In his latest book, "Atomic Irony" he proves that the Hirshoma Atom Bomb contained captured German Uranium. For more of his reports, Go Here Now.

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This is a question on the mind of most stock holders. People consider this more of an art than a science.
stock market, national debt, gdp
Tuesday, 02 April 2019 12:35 PM
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