Our "Correlation Economics" website has already amassed more than hundred correlations describing stock and bond valuations, gold, debt, deficits, the mortgage market, employment, GDP, etc.
In this article I'll go over the most prominent market moving correlations to give a thorough market outlook for the coming months. This way, investors know what to expect in the future. I'll also briefly touch my favorite correlations in the process.
1) Let's start with the stock market.
I've indicated many times already, that's we're in a stock market bubble. The Buffett rule says that the ratio of a country's total market valuation to its GDP is a very good indicator of whether the market is undervalued or overvalued. Clearly, today we are overvalued to an extreme of 124%. (Chart created by Gurufocus)
This overvaluation goes even further. While GDP growth expectations are dropping, the overvaluation could keep increasing in the
U.S. stocks retreated in July and have continued to waver in August. While no one can predict the stock market's movements for certain, I believe the probabilities point to a correction (a 10% drop), rather than a crash (a decline of 20% or more).
The main reasons I'm skeptical about a bear market include the following:
1. Corrections are temporary - Corrections are short-term interruptions within longer-term uptrends, whereas a bear market is a prolonged downturn. I believe the market's current pullback is likely to be short-lived because bull markets end in recessions, which are typically signaled by an inverted yield curve. Presently, I'm not seeing strong risk factors for either an economic downturn or yields on short-term rates moving above those of long-term rates. In fact, based on the July reading of the Institute for Supply Management (ISM) Manufacturing Index, recession looks two to three years
There is a dearth of systems for prudently managing ALL one's assets, including assets set aside for short term needs. Yet this is an important topic. Get too conservative and long term growth stagnates; get too aggressive and you risk leaving yourself permanently worse off, especially if your time horizon is not long enough to allow recovery from serious errors.
One word of clarification--the title is a bit misleading. I have nothing to say regarding one's house, cars, or any other assets that are not normally in play for financial maneuvering. While I am sure there are people who would take out a second mortgage or sell a car in order to raise investing capital, I'm not one of them. Our house is for living in and our vehicles for driving.
Background and goals. Since managing personal finances is not a one-size-fits-all activity, let me provide relevant background information. My