Why Modern Trader Forecasts Dow 21,406 for Year End 2017
One of the cornerstones of scientific rationality is nullius in verba, which means “take no one’s word for it.”
EidoSearch forecasts the Dow Jones Industrial Average will be at 21,406 on Dec. 31, 2017. Where does that number come from and how much can we trust it?
A single point forecast is meaningless in the absence of a statement of quality. Our one number is simply our median forecast – there is a 50% chance the Dow will be above or below this level (and a near 0% probability it will hit exactly this number). We can go further: There is a 70% probability the Dow will fall within the range of 24,549 and 18,650. How did we calculate this probability range? We constructed it one brick at a time based on similar market environments going back to the 1880s. We found 29 periods from history that matched the Dow’s monthly movements in 2016. Of course, none of these periods is a perfect match, but they all exceed a similarity threshold of 75%. From these comparable situations we can forecast a range of returns one year out and build a conditional empirical distribution. This knowledge helps us counter some of our most entrenched cognitive biases. As much as we desire the clarity of a single number, we cannot change the underlying reality – financial markets are uncertain and our forecasts should reflect that.
David Kedmey, President & Co-Founder, EidoSearch
Why Trump Shouldn’t Repeat Harrison’s Mistake
Donald Trump was elected president promising to use protectionist measures, if necessary, to bring jobs back to America. Economists warn that raising tariffs reduces trade and hurts the economy. The Smoot-Hawley Act of 1930 is blamed for intensifying the Great Depression, and the lesser-known McKinley Tariff of 1890 provides an instructive lesson on how protectionist policies can affect the stock market and politics.
In 1888, the protectionist Republican Benjamin Harrison defeated the pro-trade Democrat Grover Cleveland. Cleveland won the popular vote, but Harrison won the Electoral College. Harrison increased government spending past the billion-dollar mark for the first time in history, and helped to pass the McKinley Tariff of 1890, which raised tariffs about 50%.
What was the effect of the tariff on the stock market? Between 1888 when Harrison was elected and 1890 when the McKinley Tariff was passed, the Dow Jones Average was in a bull market. In fact, the pattern of the Dow in 1889 (specifically, June 1888 through May 1889) looks similar to the pattern the stock market followed in 2016 (see “Will history repeat?”). Once it was evident that the Tariff Act of 1890 would pass and was loaded down with 450 amendments, the stock market began to tank, falling from its peak of 99.14 on
May 17, 1890 to a low of 76.77 on Dec. 8, 1890.
The tariff was not popular, in part because it led to higher prices for many consumer goods. The Republicans lost control of Congress in 1890 and Grover Cleveland defeated Benjamin Harrison in 1892. Cleveland reversed Harrison’s policies. In 1894, the Wilson-Gorman Tariff Act was passed, which lowered tariffs in the United States, undoing the McKinley Tariff of 1890.
Trump should learn the lessons of history and avoid the temptation to raise tariffs as President Harrison did. Otherwise, we all will pay the price.
Bryan Taylor, Chief Economist, Global Financial Data