Seeking guidance for the DOW\? Try GDP

03/28/13 01:25:00    

By Michael Mealling

In Seeking Guidance for the Dow? Try GDP, Dr. Charles W. Mulford and Dr. Narayanan Jayaraman, assert that:

Following the market swoon of 2008 and 2009, equity prices have enjoyed a significant rebound. Investors are understandably interested in where stocks are headed next. An interesting long-term perspective on the subject can be gained by examining the extent to which Nominal Gross Domestic Product has explained the movement of share prices, in particular, the Dow Jones Industrial Average, over time. In this report, we look at the relationship between the two metrics since 1916, updated with data through the fourth quarter, 2010. Barring any unforeseen shocks, we find strong historical precedent for the Dow to be trading in the vicinity of 15,000 in 2011.

While it wasn't at 15,000 in 2011, it is now. By this analysis anything that inflates the GDP inflates the DOW. The paper's reasoning is that the simple regression between the GDP and the DOW shows a correlations that is predictive.

But is that indeed, the case?