USA Corporate Profits & Dow Jones ForecastBusiness Cycle InvestorDJIA QUARTERLY FORECAST - MARCH 29, 2007 |
MARCH 29,
2007 RECOMMENDATION: STAY
OUT
We recommend to “Stay Out” of the Dow Jones Industrial Average Index
(DJIA) until the next quarterly update in May 2007.
Review of the past 4 months
The Fourth Quarter’s 2006 US NIPA Corporate Profits announced today by the USA Government at www.bea.gov Table 6.16.D dropped by -0.3% since last quarter. The result confirms the trend of weakening Corporate Profits growth consistent with our previous forecast. The overall Corporate Profits weakness was driven by falls in Domestic and Non-Financial sectors while Financial and Rest of the World sectors rose.
Despite the trend of weakening Corporate Profits growth, the DJIA rose to 12,348 level driven by market expectation of falling interest rates as indicated by the inverse interest rates yield curve (longer rates have been lower than short term). We are yet to see if this is a correct view as Fed is keeping short rates steady at this stage. Chairman Bernanke seems to be sitting on the fence watching rapidly slowing housing market that would justify rate reduction, and inflation heading up that by contrast would justify rate increase. Indications are, if faced with the choice between the two unwelcome trends, Fed would be likely to be more concerned about inflation, albeit their decision would depend on the strength of each trend and Fed’s forecast for inflation.
Our model does not forecast inflation and unpredictable interest rates because they are lagging indicators in relation to the Corporate Profits turning points. That is not to say that interest rates decision are nor relevant; they are critical to the stock market. Over time however, the stock market will follow Corporate Profits and OUT Periods experienced historically weaker Profits growth leading to weaker stock market. During the OUT Periods interest rates decisions influence short term volatility and performance of the stock market to a great extent. However, our model cannot help here over the short term except to say that, based on history, it is not worth the risk to stay in the market during the OUT Periods as defined by our methodology.
2 months outlook:
Our forecast and recommendation is unchanged: STAY OUT of the market. The latest Business Cycle Index (green line on the chart) remains below its historical average level. This means unfavorable economic environment for the Corporate Profits growth and correlated with it broad USA stock market represented by DJIA and S&P500 indexes.
The “STAY OUT of the market” periods identified by our proprietary formula have been historically characterized by low returns (50+years historical average was 2.4%p.a.) higher volatility and 40% chance of a major fall in excess of -20% (refer to “maximum fall” column in “Out Period” Performance table). The OUT of the market Periods can however experience bubbles characterized by a significant stock market gains despite the slowing Corporate Profits trend.
While the methodology is good for identifying the major market upturns, it does not forecast which “Out Period” will experience the major fall and when it is likely to happen.
The Charts above illustrate recent performance until March 29, 2007.
Next quarterly update is planned for end of May 2007.
Sincerely
The
Business Cycle Investor
March 29, 2007
___________________________________________________________________
Individuals invest directly in the large USA market index Exchange Traded Funds (ETF) that trace Dow Jones Industrial Average or Standard & Poor's S&P 500 indexes or in an equivalent liquid USA market index mutual funds.
The ETF funds trade on the stock market just like normal stocks. One transaction in ETFs provide investors with diversified blue chip portfolio and solid dividends. Transaction and management costs are minimal.
The proprietary Business Cycle Index is an effective leading indicator of corporate profitability for the whole USA economy. The aggregate US Corporate Profits are calculated quarterly by the USA Government and published at www.bea.gov where subscribers may independently verify the forecast.
Corporate Profits have historically shown a high 93% correlation with moves in the major diversified USA stock market indexes: Dow Jones Industrial Average (DJIA) and S&P 500. Hence, the Business Cycle Index can be used as a leading indicator of the broad USA stock market.
The Corporate Profits for the whole US economy don't always move in the same direction or by the same magnitude as the profits reported by individual companies or even the DJIA or S&P 500.
More information about the research methodology can be found at www.businesscycleinvestor.com/methodology.htm
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