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Macro Forecasting The S&P 500

The work of many within the financial industry revolves around predicting and preparing for future events: What kind of return will a stock offer up in the future? Is now the right time to sell out of a certain position? To what extent will interest rates change in a year’s time?

Being aware of changes in the market is of course of the utmost benefit to investors. By examining data from past years, trends become apparent, and activity by certain indicators can lead us to make predictions of future changes with some level of confidence. To that end, we at Kruse Asset Management utilize a macroeconomic model to forecast future performance of the S&P 500 and help inform our investments.

Here are some of the indicators that we have found to be statistically relevant when making forecasts:

Volatility is a concern for many with investments and like many others we keep track of the Chicago Board Options Exchange Market Volatility Index (^VIX) and utilize a six-month rolling average of the index level. As seen by the graph below, it’s been reassuringly steady for the past couple of years now as the S&P 500 has steadily grown but the recent incline points to potentially greater activity by the “Fear Index” in the near future.

Forecasting I.PNG

The 10-2 Year Treasury Yield Spread, the difference between the 10-Year Treasury Note Yield and 2-Year Treasury Note Yield, gives a valuable insight into Treasury interest rates and their influence upon the domestic economy. Comparing just this factor alone to the S&P 500, there is a sign of some inverse correlation between the two.

Forecasting II.PNG

The statistics agency within the U.S. Department of Commerce, the Bureau of Economic Analysis, provides us with a host of valuable data and one indicator of theirs we utilize is the U.S. Personal Saving Rate, of which we again use a six-month rolling average. It’s interesting to note from the chart below that people were actually putting away more during the financial crisis of 2008 than they are currently.

Forecasting III.PNG

The three aforementioned indicators are only some of those used in our regression forecast. Looking ahead a year in time, the old adage of sell in May and go away looks to ring true four our model as a significant pullback of over 20% looks set to take place between May and October.