I looked over the stock market model paper. I also looks at the intro to the critique paper which provided a neat summary of the model:
A ‘power index,’ calculated by dividing the S&P 500 share price by the average wage rate from the late nineteenth century to the present, is tightly correlated with total returns for the S&P 500 twelve years later.
The power index is a detrended stock index, where a wage series is used for detrending. It provides a way to measure valuation levels that allows comparisons over time. There are lots of detrended indices, one of these is P/E, which Robert Shiller converted into his CAPE index that when presented to the Fed led to Greenspan’s “Irrational Exuberance” speech. Tobin’s Q is another example, as is Hussman’s valuation measure, and my own P/R.
In my own case, P/R reached its “irrational exuberance” moment in summer 1999 (see http://web.archive.org/web/20040406095317/http://csf.colorado.edu/authors/Alexander.Mike/Stanpor3a.html).
P/R gave a usable sell signal (I did sell in 1999 and it was a good move), whereas CAPE and Tobin’s Q were too early. P/R gave buy signals in July and Oct 2002 and in Nov 20 2008, which were also usable signals. It then gave sell signals in 2014 and 2020, which were wrong. All these are crude valuation-based predictions I used to test the validity of the valuation tool. What Hussman does is more sophisticated as he also uses a model based on technical analysis—which helps him avoid jumping the gun like I did.
We can use the power index to make predictions just as I did with P/R, when I was testing the concept. The close correspondence between the power index and Hussman’s valuation measure (see Fig 5 in model paper) to allow us to use 1% projected return (due to overvaluation) starting in 2013 (see Fig 4) to make short term predictions. The market in 2013 was at about 1600, while today it is 3000 points higher. According to the power index the 12-year return after 2013 are going to be low–in the 1% range. That is roughly similar to dividend yields which means the power index is forecasting that by 2025 we should see the index return to the neighborhood of 1600.
It will take about two years to get there, so we should see a big bear market beginning around the end of this year give or take six months, and probably an associated recession in 2023. How would that happened. I would guess it would reflect a growing sense that the Fed has dropped the ball on inflation, possibly because high inflation persists into the second half of this year, which is not what most people expect. A few years will tell the tale, lets’ see what happens. I hope it does, I sold out most of my stock positions back in 2013 based on Stock Cycle-based analysis, which is why I dropped work with long cycles in 2014 and started working with a new paradigm in my social science hobby.