How The RPF Model Explains 2008 - Up to Meltdown

The bursting housing bubble and mortgage crisis ultimately led to the meltdown that began September 2008. By August 2008 the S&P 500 had already fallen by 16% from its May 2007 peak. During this period 10 Year Treasury yields declined from around 5% to less than 4%. As illustrated in the chart below, this led to an increase in predicted levels of the S&P 500 index.

According to the Case-Schiller Home Price Index, home prices fell more than 10% from second quarter of 2006 to the fourth quarter of 2007 and a total of 18% by the second quarter of 2008 . This historically large decline led to (well founded) concerns of financial instability and eliminated an important source of disposable income. Once again, in anticipation of a decline in earnings, the S&P 500 index fell while the RPF Model (using reported operating earnings) showed an increase in predicted levels as interest rates declined. The two lines begin to converge in August 2008, just before the worst of meltdown began in September and October.



For more on underlying assumptions behind the calculations please see "The Risk Premium Factor: A New Model for Understanding the Volatile forces that Drive Stock Prices" (Wiley Finance) available on Amazon.  (http://amzn.to/jRHEAe )