Stock market predictions – like when a market might pull back or if it's a good time to buy stocks – sound like a great idea. Who doesn't want to know what's in store for their money? But these forecasts, even from experts, can vary widely. How are both short- and long-term stock market forecasts made, where does the information come from, and what information should investors look at?
Leading economic indicators can tell you where an economy is headed and provide information so that investors can make stock predictions. A leading indicator shows economic improvement or decline before the economy shows it.
These indicators include:
• Stock prices
• Average Earnings
• Consumer Spending
• Unemployment Claims
• Building Permits
• Product Inventory
Leading economic indicators tell investors whether an economy is expanding or contracting. For example, if unemployment claims are down and earnings are up, then it’s likely the economy is expanding.
Leading economic indicators also influence the actions of central banks. These banks may implement easing or lower interest rates if an economy is lagging. Interest rates, as they effect the cost of borrowing money, effect the economy.
These statistics and the policies which impact them tend to change before the economy changes. Experts can use these statistics to make stock market predictions.
Just as leading economic indicators predict and reflect economic conditions, market indexes also predict and reflect economic conditions. Understanding the trends of these indexes can help experts forecast the stock market and estimate the future price of shares.
Looking at market indexes both in the short- and long-term can provide investors with information about momentum and mean reversion.
Momentum is the assumption that the market—or a particular share—will continue in the same direction that it’s going.
Mean reversion is the idea that the market will even out over time. Mean reversion may happen over many years or decades, and can be hard to observe at a given moment.
Over the short term, or 3–12 months, momentum provides some information for investors: stocks that are going up are likely to continue to go up. However, over the long term, or 3–5 years, stocks that have gone up are likely to underperform, or revert to the mean.
Martingales are another way to approach how market indexes might help predict future stock prices.
Martingales refer to the idea that past pricing trends have no effect on future prices, and that the best predictor of tomorrow’s market price is the current price plus a small amount. The inputs for martingales are stock-specific, and include the current price and the estimated volatility.
Martingales are about tomorrow’s price, momentum is about short-term trends, and mean reversion is about long-term trends. By following stock market indexes and by using one—or all three—of these methods, an expert can make a more accurate stock market prediction.
Value investors don’t believe that share prices reflect all information available or that shares necessarily trade at their fair value. These investors forecast the stock market by including information outside of the market itself.
Value investors look for stocks priced less than their book value. Value investors believe that the market reacts to good and bad news, and that stock market prices might not reflect the intrinsic value, or valuation, of a stock. These investors look to purchase undervalued stock to buy at a discount, hold long-term, and sell later at a profit.
Examining a company’s financial performance, including their revenue, earnings, cash flow, and profit as well as their business model and market can all help an investor determine the valuation of a stock. Looking at a company’s earnings reports over time can also help investors analyze a firm’s financial health.
With this information, an investor can calculate the price-to-book ratio (P/B). This ratio compares the stock price with the value of the company’s assets.
Value investors look for stocks with a below average P/B ratio. Investors purchase these stocks when they can predict that the share price will rise to a more average position.
To predict the stock market, understanding the health of the economy, as well as the policies surrounding that economy, are key. Examining your goals as an investor—such as knowing your time-frame and risk tolerance—will help you choose the right information to look at.
Additionally, unusual economic circumstances can make variations in stock profitability wider and much more obvious, and these variations can help investors observe trends and make long-term stock market forecasts.
Check out the advice of these experts on stocks that are doing well now—and are expected to do well long-term.
It's true that global markets rallied last week, and the Dow Jones Industrial Average has climbed 3.8% since Tuesday, Feb 16.
But our stock market predictions show more losses ahead. In fact, Money Morning Global Credit Strategist Michael E. Lewitt says investors should not be fooled by the strong performance of stocks last week.
Here's why the markets are falling and how to protect your money...
The end of the year is always an opportunity to take stock of what we achieved over the last 12 months.
Money Morning's Michael Lewitt made a lot of predictions about markets, sectors, and individual stocks in 2015 - always aiming to make calls that are forward-looking, actionable, and accurate.
For example, he projected the collapse of Valeant Pharmaceuticals, and many readers made serious profits off of his short recommendation.
Here's how his other 2015 market predictions panned out...
Rather than trust markets to heal themselves, the world's central banks have polluted markets with flawed economic theories and trillions of dollars of debt. Rather than ignite economic growth as they had hoped, however, they have suffocated the global economy.
The Dow Jones Industrial Average, Nasdaq, and S&P 500 each trade near all-time highs as we approach Q3 2015. It's been one of the longest bull runs in years.
Now, many stock market predictions from Wall Street pundits call for a correction as early as Q3 2015.
There are more warnings of a stock market correction circulating now - especially since the Nasdaq and S&P 500 both reached closing record highs Friday.
The Nasdaq Composite closed at a record high on Friday at 5,092.08. That was the first time the index had set a record in more than 15 years. The S&P 500 closed the week at 2,117.69. The Nasdaq and S&P 500 have now climbed 7.7% and 3% respectively in 2015.
At the same time, more than $79 billion has left U.S. stock funds this year.
This chart shows how fast money is fleeing stocks...
Trusting Wall Street stock market predictions could be hazardous to your portfolio's health.
In particular, the annual Wall Street stock market predictions made by the top analysts are so inaccurate, a blindfolded monkey with a dartboard could do better.
Collectively, the forecasts of these "experts" over the past 15 years have been off by an average of 14.7 percentage points a year. That's worse than if they'd simply guessed the long-term average return of 9% every year.
Any other worker with a track record like this would be fired immediately...
Stock market predictions are typically bullish in April. According to The Stock Trader's Almanac, the S&P 500 has climbed every single April since 2006 by an average of 3.1%. Since 1950, it has been the best performing month for the Dow Jones.
This monthly spike is usually attributed to strong Q1 earnings reports hitting Wall Street. Numerous companies will also raise their guidance figures for the full year in April.
This year, things aren't as bullish in the short term. Our stock market predictions today call for continued volatility into Q2.
For the first time since 2008, stocks traded down on the last trading day of the year and the first trading day of the New Year.
Whether this will prove to be a mere statistical curiosity or a harbinger of troubles ahead remains to be seen, but there are enough headwinds facing investors to force them to don foul weather gear for the year ahead.
When it comes to the stock market, it's not the "little dips" that are a concern, Money Morning Capital Wave Strategist Shah Gilani said Tuesday.
What is worrisome are the "black holes," and if and when we'll step into one.
With Goldman Sachs' $100 million loss Tuesday, and the Nasdaq shutting down for hours today, looks like we're already there...
Click on Shah's video for the full story.
It's one of the biggest mysteries in finance right now. I mean, it's a real head-scratcher...
On one hand, demand for silver coins is off the charts. In fact, it is so strong even the U.S. Mint is having trouble keeping up with demand.
So how is it possible for silver prices to be falling?
Here’s an insider’s take on this conundrum...
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Sure, gold remains the favorite of most precious metal investors, but THIS is the metal you really want to double down on right now. Three catalysts will propel the price much, much higher over the coming months and years.
