The State of the Markets:
Happy Monday and welcome back to the land of blinking screens. I don't know about you, but I've been intrigued lately by all the projections/prognostications that analysts feel compelled to provide at the beginning of each year. So, just for fun, I thought I'd join in the game this year.
To be clear, I do NOT manage money based on predictions, macro views, or the proverbial gut hunches. No, I prefer to stick to the weight of the evidence from a plethora of market models. I strive to keep portfolios positioned in line with what "is" happening in the market and not what I think "should" to be happening in the market. I learned a LONG time ago that Ms. Market doesn't give a hoot about what I think "ought" to be happening in her game and that my primary job is to try and get it mostly right, most of the time.
However, I'm also known in the business as a bit of a model geek. So, I decided to try my hand at "modeling" the outlook for the S&P 500 this year. But as I hope I've made clear, this is a "just for fun" exercise.
The Market Drivers
I decided to start with what I believe to be the primary drivers of stock market returns. Namely the economy, earnings, monetary conditions, inflation, the technical health of the market, and historical market cycles.
I then dug into my trusty model toolbox and dug out indicators and/or models for each of these components. Or in some cases, I combined multiple models to create a composite model.
I wound up with seven models. Next, I looked at the average annual historical return of the S&P ...