2024-02: Real economy as drivers (causal predictors) for US equity 6 months out (AI stocks having run away)

As of Wed 21 Feb, using 6-month ahead forecast period,

as computed by searching for QQQ.US;SPY.US;DIA.US on tsterm.com,

the common causal predictors for US stock index ETFs QQQ, SPY, DIA are

• S&P Dividend ETF SDY (a basket of dividend-paying stocks producing Western daily necessities)

• iShares 1-3 Year Treasury Bond ETF SHY

• Amazon AMZN (online retailer, cloud services)

What’s plotted are their 3 past month price trajectories. The top three predictors all went up then down. For bond, the corresponding average 1-year up to 3-year US Treasury yield rate must have gone down then up, as a bond is valued by

Bond price today = coupon / (1+r) + coupon / ((1+r)(1+r)) + coupon / ((1+r)(1+r)(1+r)) … + principal / ((1+r)…(1+r))

Each term in the addition is a piece of cash flow discounted at various future time points. The last term for repayment of the bond principal to the lender.

Note by one theory of equity valuation, to price a stock, there is a similar formula:

Stock price today = total net earning at year 1 / (1+r) + total net earning at year 2 / ((1+r)(1+r)) + …

Now the comment is of nature of conjecture from this point on — given similar price trajectory of SDY, AMZN vs the bonds SHY, it may be that the nominal total net earning looked to be flattish without much growth. With unit price going up, the demanded volume may be going down. However as of late, SDY, AMZN showed better resilience than (did not drop as much as) the bonds SHY, so the nominal total net earning looks to go up again in the real economy.