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The US equity market has been choppy in the short term but boring in the medium term.
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As fundamentals are stable and technicals are unclear, the overall market direction is uncertain.
Here is an introduction to a very simple yet useful way of "projecting" the stock market, which I introduced in local Chinese newspaper columns years ago.
The stock market is a very leading indicator, and there is but one ahead of it: the well known yield curve that predicts recessions.
Former and present Federal Reserve chairmen Ben Bernanke and Jerome Powell have come up against the inverted yield curve, and both claimed that "this time is different" in that no recession lies ahead.
It turns out that both were slapped down by reality.
There should, by now, be much doubt about the power of the curve.
The slope of the yield curve, or more precisely, the long-short yield gap, projects recessionary possibilities in one to two years ahead, according to literature and to correlation calculation.
On the other hand, the stock market leads the economy by one to two quarters.
As such, it follows that the former should be able to help one project the latter.
By comparing 10-year and three-month Treasury yield gaps with the S&P500's year-on-year growth, a good correlation is seen in the chart on top, with the former leading the latter by 25 months.
The yield gap over the past two years predicts the S&P500's growth movements over the next two years.
Converting the index growth to level, a projected path is shown in the dotted line in the chart at the bottom and is "connected to" the existing path by shifting parallel upward.
Without treating it too seriously, a sharp correction will be ahead and market will gain momentum again after a year.
Whether that happens or not, this possibility is at least grounded in a powerful crystal ball reading - the yield gap.
Law Ka-chung has worked in the financial industry and the government for two decades. Reach him at facebook.com/kachung.law.988 or lawkachung@gmail.com
