The initial Q1 GDP growth estimate was lower than my forecast. It smells like 2.2% rather than 3%, but to the Obama administration it just plain smells. My estimate was high, not because of inventory, but because of a reduction in government spending. If this component had stayed constant, GDP would have been 2.8%.
Proponents of smaller government believe it is worth limiting economic growth in the short-term to free up more money for the private-sector in the long-term. Fans of big government will complain that you are limiting important spending when the economy needs it most. But that means you should spend more money when the economy is bad because you need to and you should spend more money when things are good because you have more money to spend. That philosophy is how government got so bloated in the first place.
However the worst news of the GDP report is that the growth of non-residential business investment is continuing to slow. This should be increasing in a healthy, growing, recovering, economy. A reduction in business investment is how most recessions start. Business investment is still increasing, but the trend is ominous. If you looked at this statistic alone, you would expect a recession to start by the end of the year.
The weak GDP combined with very disappointing April jobs numbers and weaker retail sales means that Q2 GDP will be lower than Q1. This is consistent with my Kentucky windage reading last month. The problem is growth is decreasing from 2.2%, not 3%. This means GDP of 1 point something, you fill in the blank because it really doesn’t matter. I’ll say 1.8 just for reference (or a .4 drop from wherever the revised Q1 ends up).
2012 Model T Forecast
Last year the Model T predicted an S&P 500 Index high of 1400 for 2011. The Index peaked in April at 1370 (around 2% lower than the target). This year the model forecasts the 2012 peak at 1435. The index hit 1422 (within 1% of the target) in March.
The Model T forecast would indicate that there is a good chance that the stock market has already hit its peak for the year or that it will do so soon, provided the current rally has one more surge. The economy is mirroring last year, so it is logical that the stock market will do the same. If this is true, look for the market to dip to around 1245 later in this year.
In calculating the bottom, I am assuming there will not be a “Greek Tragedy” this summer. I know there could be a “Spanish Disposition” or some “Italian Ice” but I have to inject some degree of optimism into this ugly post.
I do not advocate timing the market with your entire portfolio. However, if you are thinking about buying stocks, I would wait. If you are considering harvesting some profits, you should consider doing it now. It may be a good time to reduce the risk in your mutual funds, IRAs and 401-Ks.
Long-Term Model T Forecast
The original purpose of the Model T was to predict long-term peaks and valleys of the S&P 500 Index. For the first time since I began writing this blog, the Model T is predicting the next “major” peak. The model forecasts the S&P 500 will reach 1480 in January of 2014 before the start of the next bear market. Of course this forecast will change as the inputs to the model change, but you are getting this forecast 20 months in advance. I’m sure that you will consider this the “Most Interesting Stock Market Prediction In The World”, so plan wisely my friends.