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Here Is How The Economy Is Really Doing And How It Will Drive The Stock Market Over The Next Few Years

Mar. 08, 2021 8:25 AM ETSPY, QQQ, DIA, SH, IWM, TZA, SSO, TNA, VOO, SDS, IVV, SPXU, TQQQ, UPRO, PSQ, SPXL, UWM, RSP, SPXS, SQQQ, QID, DOG, QLD, DXD, UDOW, SDOW, VFINX, URTY, EPS, TWM, SCHX, VV, RWM, DDM, SRTY, VTWO, QQEW, QQQE, FEX, ILCB, SPLX, EEH, EQL, QQXT, SPUU, IWL, SYE, SPXE, UDPIX, JHML, OTPIX, RYARX, SPXN, HUSV, RYRSX, SPDN, SPXT, SPXV8 Comments
David Rice profile picture
David Rice
977 Followers

Summary

  • Using historical data, I will show how current economic conditions compare to like periods in the last three business cycles.
  • Based on this comparison, a reasonable projection of stock market growth can be made.
  • The analysis shows the extent of the stock market upside projected out six years.

As I chart out an investment strategy for the near future, I want confidence that it is based firmly on reality. For this purpose, in this article, I'm clarifying the state of the economy and the long-term upside potential of the stock market going forward.

There is often commentary about the disconnect between the economy and the stock market. Although in the short run, the two can disconnect, and in the long run, economic expansions drive the stock market upward. This is clearly seen in Chart 1.

There is no surprise that the stock market has an overall positive trend during business cycle expansions (white spaces) and significant drops when recessionary conditions are evident (gray bars). However, this reinforces that in the long run, fundamentals drive the stock market. When the economy begins to weaken and contract, eventually the stock market will follow. When the economy is in an expansion period, the overall trend of the stock market, despite periodic corrections, is positive. Knowing where the economy is in a business cycle can serve investors well.

Chart 1S&P 500

Where the economy is as we come out of the COVID recession may seem obvious. However, what I want to know is when were comparable periods in previous business cycle and what happened to the stock market after that.

Historical perspective on current economic conditions

To understand where the economy currently is and what this means for the stock market, it is useful to look back over past business cycles and find comparable periods. Looking at the unemployment rate, which is currently 6.2%, for the last three business cycles, comparable periods when the unemployment rate was just above 6% were in 2Q 2014, 2Q 2003, and 2Q 1994.

Because I want to tie economic conditions to the stock market, in Chart 2, I'm showing

This article was written by

David Rice profile picture
977 Followers
My career has involved developing and contracting with health care delivery systems. I currently work at a small college, focusing on my economic and market interests. I've developed the Econ P.I. website (www.econpi.com) to accurately show economic conditions and determine how financial markets might be impacted.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (8)

M
Thanks David! Been a while since you’ve been on here thanks for providing your input. It was fun tracking you BaR grid last year after the pandemic going through the recovery and expansion quads. I have your website on my taskbar for my browser... keep up the good work.
David Rice profile picture
@M85897 Thanks. Always good to hear that others find the BaR useful.
ANG Traders profile picture
Excellent report! Thank you professor.

I have been pounding the proverbial table that we are in a similar situation as the 1990s...only better. During the 90s Clinton (following Larry Summers' advice) reduced the deficit all the ways to a surplus.

Since a government surplus = a nongovernment deficit, the private sector took on debt to make up for the private deficit....and yet the market went up 200% between 94 and 2000. This time is better because we have a historic private sector surplus with low private debt. The next 5-10 years will make the 90s' bull like a calf.

Only two constants in every bull market....money and fear...and we have both.

Thanks again for the BaR.
David Rice profile picture
@ANG Traders My upside may not be quite as optimistic as yours, but I like the opportunities that are ahead.
Market Map profile picture
The pending "turn up" of the reading / trend of the Conference Board Leading Economic Index, a robust and comprehensive measure of economic trend, has promising implications for higher equity prices. Since 1960, when the "trend" value of the CB LEI has turned up from the "trough", this after falling into negative or red territory, forward 2 and 5 year market returns have been decent. The CB LEI has fallen into negative territory in 2020 , a rare event. https://imgur.com/a/ZWtYBMS
David Rice profile picture
@Market Map Your LEI chart reflects what I show on Grid 2, where the leading indicators (LD) is below the baseline. Like the BaR leading indicators, the LEI includes weekly unemployment claims, which are pulling the LD and the LEI down. Right now, leading indicators, rather than lead, are showing the drag of unemployment on the economy. That is why the MoC completes the economic picture. It shows that despite the drag of unemployment in some sectors of the economy, the economy is on its way to recovery.
ndk1 profile picture
ndk1
08 Mar. 2021
Thanks for the work you put into this. It's a great thing to have projections based on science, as in real facts, rather than the usual Chicken Little narrative.
David Rice profile picture
@ndk1 Thanks. I agree, a lot of narrative lacks objectivity.
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