By Mark Hulbert
CHAPEL HILL, N.C. – A good chunk of the bull market’s excesses have been worked off, according to the “Single Greatest Predictor of Future Stock Market Returns.” And that’s good news.
I’m referring to the indicator, first proposed by the Philosophical Economics blog in 2013 , that is based on the average household’s portfolio allocation to equities. It is a contrarian indicator, with higher equity allocations associated with lower subsequent market returns, and vice versa. According to econometric tests to which I’ve subjected it and other well-known valuation indicators, it does indeed have one of the best—if not the best—track record predicting the S&P 500’s /zigman2/quotes/210599714/realtime SPX -1.79% subsequent 10-year total real return.
According to just-released Federal Reserve data , this indicator over the last calendar quarter experienced one of its biggest (and therefore bullish) drops since the early 1950s, which is how far back data extend. But for the quarter encompassing the waterfall decline in March 2020 that accompanied the initial lockdowns of the COVID-19 pandemic, you have to go all the back to the final quarter of 1987—which included the worst crash in stock market history—to find a quarter in which this indicator fell as much as it did in this year’s June quarter.