The fall in the S&P 500 index, predicted a year ago and well documented in a working paper (S&P 500 returns revisited) and a monograph, did happened in May 2010. On May 29, 2010, one more trade day on May 31, the level of S&P is around 1090. According to our model is should be 1132 by the end of May.
The yearly returns started to fall in April-May because the growth in April 2010 was smaller that than in April 2009. Figure 1 demonstrates relevant monthly returns. May 2010 is the first month since March 2009 when S&P sinks below the previous month’s level.
Figure 2 compares the S&P 500 returns with those predicted from real GDP reading. Lately, the BEA has revised its estimate for 2010Q1 down to 3.0% from the previous estimate of 3.2%. We included the revision into the predicted curve. Figure 3 displays the most recent period to show the start of the fall. So, the fall has starter, and likely will extend into 2011. In terms of GDP, there should be not more than 5% in 2010Q2. According to the fall in S&P 500, the second half of 2010 will be characterized by low growth rate.
Figure 4 depicts the model linking S&P 500 to the number of 9-year-old, N9. The future numbers of N9 are represented by the number of 3-year-olds, N3, shifted six years ahead. All in all, the level of S&P 500 should suffer a further fall into 2011.
We will be reporting the comparison of the observed and predicted S&P 500 in due course.
Figure 1. Monthly S&P 500 returns
Figure 2. Observed yearly S&P 500 returns and those predicted from real GDP according to the relationship shown in the low left corner of the panel.