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Stock Market Analysis - The Bearish Case

As seen in the following charts, it would seem that I can predict the inflation adjusted S&P 500 index reasonably accurately if you tell me current nonfarm payrolls, weekly initial claims, and real disposable personal income. Yep, that's it. You don't even have to mention treasury yields. If you are curious, my model is fully described within the charts below. Enjoy!


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Well, would you look at that. Let's make a scatter chart.


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How's that for exciting? I'd say it is far better to invest near the lower left corner than the upper right corner, but perhaps that's just me. As seen in the chart, we're very close to where we were at the height of the stock market bubble (July 2007) just before the Great Recession. That's very exciting, but only in a gallows humor sort of way perhaps.

As if that chart isn't bad enough, I'm not done yet. There are three things that make up my model. Let's look at each one individually to see how we're doing. We'll do nonfarm payrolls first. I haven't updated the chart lately, but I'm sure it is close enough to get the idea.

April 6, 2013
40.9 Million Missing Jobs (Musical Tribute)


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Ouch. That trend failed in an epic way and there's just no getting back to it. It's not even remotely possible. Sorry. My model suggests that the lack of historic nonfarm payroll growth going forward will put a serious damper on long-term stock market performance going forward. Big shocker.

Let's look at the inverse of initial claims. That's part of my formula too. The more initial claims go down, the higher the stock market will go. Everyone knows it. This is hardly rocket science.


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Ouch. I can't speak for you, but that most certainly does not inspire confidence in me. We're near the very top of a declining trend channel. I'd even go so far as to call it cyclical growth within a secular bear market. I'd definitely err on the side of caution here.

Let's look at real disposable personal income, or more importantly its growth. That's the last piece of the puzzle. It is seemingly our only hope at this point, at least over the long-term. Since it is a noisy series and all we really care about is the long-term, let's look at the semiannual data (averaged) to smooth it out.


Click to enlarge.

Ouch. Now that's just painful. Guess what? Although I locked in long-term rates on TIPS and I-Bonds whenever I could, ZIRP is not actually enhancing my real disposable personal income. Further, if it isn't enhancing my income then think what it is doing to those who did not lock in rates (as they were repeatedly told not to do!). Once again, big shocker.

So let's summarize. My model says that the stock market should be high. The components of my model are mostly aligned in what looks to be a brand new era of prosperity. Unfortunately, my model also says that these components are only temporarily aligned more than likely. It's just an illusion of prosperity.

Welcome to my permabear world. The stock market may go higher from here, but I have absolutely no desire to put my nest egg anywhere near it. None. Nada. ZIRP.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart
St. Louis Fed: Initial Claims Inverse
St. Louis Fed: Real Disposable Personal Income Growth

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