With the one month anniversary of the stock market's reaction to the Brexit vote event, the fourth week of July 2016 provided the first test of the latest method we're testing out to account for the echo effect that our standard model experiences due to its use of historic stock prices. Here, because we use historic stock prices as the base reference points from which to project future stock prices, when those historic prices reflect abnormal levels of volatility, it can affect the accuracy of our standard model's projections of the future.
To see what we mean, the following chart shows what our standard model projected for the most likely trajectories for U.S. stock prices in Week 4 of of July 2016.
As you can see, the S&P 500 was following the trajectory associated with investors focusing the distant future quarter of 2017-Q2 in the period immediately preceding Week 4 of July 2016, and was more closely following that trajectory following the end of the one month echo of the Brexit noise event.
In between however, our standard model's projections mirrored the volatile trajectory that the S&P 500 followed during the Brexit noise event, which deviated sharply from the actual trajectory that the S&P 500 took during that portion of the week.
As part of our imaginatively named "Modified Model 01" (MM1), we substituted alternative trajectories for the S&P 500 that parallels the average trajectory that the S&P 500 has taken over the last 65 years. From first appearances, MM1 appears to have passed its first test, with its projections of stock prices during the week coming much closer to the actual recorded values.
That's not saying very much. We could have even more easily just "connected the dots" for the projected values of the S&P 500 on each side of the echo for the one month anniversary of the Brexit noise event for each alternative trajectory with straight lines and have achieved just as good a result.
The bigger test will come later in the quarter, when we reach the one year anniversary of the volatility that accompanied China's market meltdown in mid-August. We have no idea how that's going to turn out.
Looking back at Week 4 of July 2016, here are the headlines that caught our attention during the week.
- Monday, 25 July 2016
- Tuesday, 26 July 2016
- Wednesday, 27 July 2016
- Thursday, 28 July 2016
- Friday, 29 July 2016
-
- Fed's Williams sees up to two U.S. rate hikes this year - also, Fed's Williams downplays GDP weakness, sees rate hikes
- U.S. banks dialed back risky loans early this year: regulators
- Fed should not overreact to Friday's Q2 U.S. GDP data: Kaplan - also Fed making 'sluggish' progress on goals for U.S. economy: Kaplan
- Tech shares and muted GDP growth push S&P 500 to record
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Closing values for previous trading day.
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