Why the S&P 500 Should Climb Even Higher by March

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Do you really believe Wall Street cares who in Washington is calling someone else a moron? Of course not.

So why was the story that Secretary of State Rex Tillerson may have called President Donald Trump a “moron” one of the most popular on the MarketWatch site earlier this week?

The reason I ask: I want to make a point about how hard it is for us to focus on what really matters. We let our attention be diverted by myriad distractions dominating each day’s headlines, without stopping to ask whether any of them make any real or lasting difference to the profitability of the companies we own. Indeed, evidence shows that trading behavior is influenced by factors as extraneous as whether the sun is shining or whether our favorite sports teams are winning or losing.

One adviser who’s made a career of keeping his eyes on the prize is Sam Eisenstadt. For those of you who don’t know him, he is the former research director at Value Line Inc.  Though he retired in 2009 after 63 years at that firm, Eisenstadt continues to update and refine a complex econometric model that generates six-month forecasts for the broader U.S. market.

That model’s latest projection is that the S&P 500 will be between 2,620 and 2,640 on March 31 of next year. That’s between 2.7% and 3.5% higher than where the U.S. market benchmark is trading currently.

The reason to take this projection seriously is Eisenstadt’s track record. Consider a statistic known as the r-squared, which measures the degree to which one data series predicts or explains another. If the first series perfectly predicted the second, the r-squared would be 1.0; if the first series had absolutely no predictive ability the r-squared would be zero.

For the data plotted in the chart below, the r-squared is 0.31, which is significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine. Though you might be disappointed that this r-squared isn’t higher, you should know that most of the models that get attention on Wall Street and in the financial press have r-squareds that are far lower—if they’re not actually zero.

So when you see a six-month forecast that is significantly more or less bullish than Eisenstadt’s, ask what the r-squared is on past six-month forecasts. I bet that statistic doesn’t even factor into the calculation.

Eisenstadt constructs his model to include all factors he has found to have an ability to project the stock market’s subsequent six-month return. Though his model is proprietary, Eisenstadt has told me that two of the more important inputs are low interest-rates and market momentum. Both factors are mildly positive right now: The yield on the 10-year U.S. Treasury note, already low by long-term standards, is 25 basis points lower today than where it stood at the end of March. And the S&P 500 has been rising at an above-average rate.

Don’t expect perfection, but on occasion Eisenstadt’s model has come as close as you’ll ever see in the messy world of stock-market forecasting. Its six-month-ago projection was that the S&P 500 at the end of September would be trading at 2,450, which turned out to be 2.7% below the 2,519 level at which it actually closed the third quarter.

I doubt any of Eisenstadt’s followers are complaining, given the wide range of what could have happened over the last six months.

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.