S&P 500: decline and fall

A year ago we predicted a kink in the growth of S&P 500 returns in April-May 2010. This prediction is accurate enough with S&P 500 increased with lower increment in April and May 2010 than it was in April and May 2009.

We've just published a paper (S&P 500 returns revisited) on the prediction where we have put the S&P 500 closing level in April 2010 at 1187 (actual was 1186.68). In May 2010, the (monthly closing) index should fall to 1132 and manifest the start of absolute decrease. So, what we have been recently observing was a decline and we will observed the fall, likely extended into 2011.

Relevant data:
stock prices - finance.yahoo
real GDP - Bureau of Economic Analysis
population - Census Bureau

Figure 1. Observed and predicted S&P 500 returns (12-month cumulated). Notice the turn from growth to fall in April-May 2010. The predicted returns are obtained from the model linking S&P 500 to real GDP. See details in the paper cited in the text.

Figure 2. Observed and predicted S&P 500. Red line was predicted in March 2009. The turn in May 2010 is expected with S&P 500 falling from 1187 to 1132. The model links S&P 500 and the number of 9-year-olds, as presented in the paper. According to our estimates, the absolute level of the index may sink below 1000 before 2011 and even 200-250 deeper by July 2011. As before, we display several figures with absolute S&P 500 and its returns.

Figure 3. The prediction of the S&P 500 returns between May 2010 and December 2011. The (12-month cumulated) returns will drop to -0.5. At monthly rates, the returns will be around -0.05 in December 2010.

One may find it interesting to compare our predictions to those made at POLITICAL CALCULATIONS, the only independent blog we have a link to.