Results as of April 30, 2012
The PAR Model™ moved to a somewhat larger negative position in April:
S&P 500 6-m expected return: −6.8%
Recommended allocation: Underweight
Prior month -5.2%
Putting It in Perspective
Starting in 2008, the Federal Reserve has implemented monetary stimulus measures that were unprecedented in their size, in order to help the U.S. economy recover from its deep recession. These efforts supported credit creation and the prices of capital and real assets; and the economy has been recovering, albeit slowly. Inevitably however, a portion of the tremendous amount of liquidity has found its way directly into liquid financial assets (such as stocks, bonds, and commodity futures), moving their prices to higher levels than they would be otherwise.
In 2012, the Fed started signaling that, while it is committed to keeping rates low for a while longer, it is done with new easing. The central bankers are clearly counting on the economy to start growing on it own, without additional stimulus.
Our PAR model was detecting the statistical significance of the Money Supply in 2011, which was present in the model all year. At the beginning of 2012 however, the model detected that equity returns are no longer driven by money supply. This potentially confirms the Fed’s view, at least directionally.
With the economic growth in the U.S. now picking up, the returns are being exceedingly driven by economic factors. The PAR model detected this important shift in the drivers of equity returns, with two economic variables added in January – the Economic Cycle Research Institute’s (ECRI) Leading Index, and Durable Goods Orders.
Suppose that we agree with this qualitative argument. But how can we quantify what effect all these factors have on the equity return in the near future? And are there other significant factors that we are not capturing yet? The PAR Model™ provides the answers:
- The price of crude oil, above $100 per barrel, extends significant negative influence on the expected equity return.
- The Economic group of factors are still at levels where they have a net negative contribution.
- Equity valuation is positive.
The PAR Model™ indicates, based on all its relevant factors in combination, that the S&P 500 return is expected to be a negative 6.8%.