On the Predictability of the DJIA and S&P500 Indexes

Abstract

We obtained from Standard and Poor�s Corporation the complete 126-year history of the Dow Jones Industrial Average (DJIA) daily closing prices. We are applying rolling window averaging and adaptive learning methodologies, coupled with robust estimation methods, to examine which are the best forecasting models over a broad range of economic and financial conditions during the life of the index, based on daily and monthly stock index prices, and daily, monthly, and semi-annual stock returns. Why is an AR(1) model a reasonable benchmark of stock prices? Why do we have it? What should be our forecasting benchmarks? Do we find forecasting improvements from the Hendry-Castle-Doornik-Clements approach using robust forecasting methodologies and saturation variables in the prices of the index? Given that the DJIA fell over 15% during the first half of 2022, is this one of the worst six-month periods ever? What has happened to the Dow, historically, during such periods in the past with regard to six-month, one-year, and three-year-ahead stock returns? Is capitalism dead or doomed? We report statistically significant forecasting improvement from saturation and robust forecasting techniques during the 1896�June 2022 period. We report forecast stock returns for the next six months and three years that are bullish. In the King�s English, June 30, 2022, was another excellent common stock buying opportunity and Capitalism is not dead.