The economic downturn in the second quarter of 2017 January 23, 2017 – Posted in: analyses, posts

The inflation model built on the basis of price indices for WIG20 index and the model based on American companies’ advertising expenditures point in the same direction which means the economic downturn in the second quarter of 2017.

 

The inflation model for WIG20 index

Since mid-2013 until November 2016 we had to deal with inflation oscillating near 0 in Poland. At the same time, treasury bond yields remained low. However, from March 2015 inflation began to grow from -1.3 percent and it reached the value of +0.8 percent in December 2016.

It is believed that the low inflation and low nominal interest rates and a stable low money market create favorable conditions for the first so-called non-inflationary boom on the stock exchange. It does not have to be dynamic at the same. For more than two years of very low inflation in Poland, it was difficult to talk about any signs of the boom on the Warsaw Stock Exchange.

At the beginning of 2016, only one year later after the reversal of the direction of inflation changes the situation began to change. According to the classic concept of market cycles combined with the escalation of economic growth, we may have to deal with the second phase of the boom accompanied by rising inflation.

It is an open question whether the current situation fulfills conditions of the beginning of the second phase of the boom. Some of our models suggest that it does not, although the current increases may still take time. The simplest hypothesis is that the increase in inflation which typically coincides with an increase in bond yields, that is, fall in their prices, may be accompanied by the flow of capital from the debt market to market instruments with a higher risk such as shares.

So far we decided to find out if changes of price indices have some legible impact on the situation on the Warsaw Stock Exchange. We built a simple linear model of WIG20 changes of 5 months anticipation. It is also particularly relevant that the model is based only on changes in price indices of goods, services, and production in various branches of the Polish economy.

The results imply a positive trend in the index until the end of the first quarter and then its weakening.

“Advertising model” for S&P500.

It is very interesting that the results of the inflation model for the WIG20 index coincide with the results published in a separate article for the S&P500 index basing on a completely different group of variables, namely on the advertising expenditures incurred by US companies.

The results from the model provide an increase of the S&P500 index to the end of March 2017. Next, it is expected the possible weakening of the index. The course of changes in the WIG20 index is very similar and synchronized in time.

The results obtained independently from models that directly forecast indices (both for the WIG20 index and the S&P500 index) are coherent with the results from the models that anticipate changes in the rate.

 

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