A broad stock index of the US market like Dow or S&P500 is impacted by the purchasing power of the consumer or in other words disposable income of the masses. In 2014, I published a formula on SeekingAlpha/Talkmarkets to predict the stock market for an year based on factors influencing the disposable income of the middle class. Since 2009, I have been using these factors to predict the stock market and so far the formula has never failed.
Let us use the same formula this time again for 2017:
S&P increase /year = 20.2
+3.4* percent increase in Wages
-3.4 * percent increase in CPI
-0.8 * percent increase in Home prices
-0.5* percent increase in gas prices in first 4 months of the year
-1.4 *(percent increase in home prices * percent increase in ten year yield )
-7.4 *(percent increase in ten year treasury yield * percent increase in ten year treasury yield )
Here are my assumptions for these factors for 2017:
Wages: Wages went up more 3% in 2016 and with low unemployment and Mr. Trump’s push to bring jobs back to US, wages should go up at least 6% in 2017
CPI: With a Strong Dollar impacting import prices, CPI should not go more than 2%, similar to 2016
Home Prices: With rising interest rates, home prices should stall or go negative. I would use 0% rise in calculation.
10 year Treasury yield: With clear signs by the Fed to increase the interest rates 3 times in 2017, the 10 year treasury should go up at least 0.5% in 2017. For the sake of this calculation I would use the number as 1%.
Gas Prices: With the Trump administration not so much against Russia and cutting down of oil production by major oil producers, gas prices should go up another 20% in 2017 just like it did in 2016.
|
|
|
2017 |
|
|
|
Increase |
Factor |
TOTAL |
|
wages |
6 |
3.4 |
20.4 |
|
cpi |
2 |
-3.4 |
-6.8 |
|
gas |
20 |
-0.5 |
-10 |
|
home prices |
0 |
-0.8 |
0 |
|
10 year*10 year |
1 |
-7.4 |
-7.4 |
|
home*10 year |
0 |
-1.4 |
0 |
|
static factor |
|
|
20.2 |
|
|
|
Total-> |
16.4% |
Conclusion: 2017 is a different year due to a new US President who has wowed to change the existing world order based on globalization. It would be a test of the disposable income formula if the disposable income of the middle class impacts the stock market in the changing world order. The impact of changing relations with China still need to be seen.
Though the disposable income formula predicts the stock market to go up by more than 16% in 2017, as the stock market has already gone up after election in Nov 2016 in anticipation of higher wages in 2017, I would say the stock market would go up in 2017 around 10%.
