U.S Stock Market Valuations continue to warn

We have updated the RecessionALERT Valuation Index (RAVI) forecast models for the SP500 using 4Q2018 data. Stock market valuations continue to pose a “clear and present danger” to positive economic and SP500 returns outcomes, and have worsened since our last warning .

One and two year SP500 forecasts continue to offer relatively accurate short-run estimates despite their low overall long-term correlations and both are foretelling mediocre returns (click image for larger view):

To this end, as is tradition, we offer SP500 forecasts to end 2019 as follows, taken from your dashboard, with the understanding that despite relatively surprising accuracy the last 4 times we did this, one-year ahead forecasts can vary significantly from actual outcomes:

Of more concern however is the continued deterioration of the smoothed-RAVI forecasts which are used as market timing signals with 3 quarter ahead warnings. You can view these on the CHARTS>MACRO>RAVI tab

At this point in time the only major vectors of concern from our universe of models are that over 60% of available term-spreads have inverted (bar the 10yr complex) and that valuations are beginning to get close to sounding the alarm.

We would remind you however that recession (and stock market) forecasting is more art than science – if it were that easy, everyone would have seen 2008 coming – and we maintain that a battery of diversified indicators and models need to be monitored and taken into a investment decision making process. Two models in the more than dozen we maintain for clients is likely not robust enough to base investment actions from.

About Dwaine Van Vuuren

Dwaine has a Bachelor of Science honors degree and is a full-time trader and investor. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT into a company used by hundreds of hedge funds, brokerage firms and financial advisers around the world.

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