The Best Way to Predict Fluctuations in The Stock Market
My name is Robert Bonavito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only.
When we do valuations of trusts, a lot of times these trusts hold a lot of stocks and bonds and stuff like that. And it's important for us to try to understand what’s going to happen in the future in the stock market or the bond market. And what we do in our firm is, in order to figure out what's going to happen in the future and possible fluctuations in the stock market, is we look at the spreads between a 2 and 10-year bond. And what this is telling you, if you follow the spreads, what's going to happen. For example, if everybody is buying the 10-year bond, the interest rate on that bond is going to go down and the spread between the 2 and 10-year is going to be compressed. And if we see that happening, what that's telling is that the economy is going to have issues going forward, and the stock market is going to go down. Because what people are doing, it's "the wisdom of the crowds," they're buying that bond, paying 2% and they're assuming that things are going to get worse so they want to lock their money in at 2%, or 4%.
But if people are not buying that bond, the rates are going to go up on the bond. So what that's telling me is that people think that the interest rate on the 2-year bond is too low, because things are getting better. So what that's telling us is that the future of the stock market is probably going to go up. It works every time. If you just look at the spreads, if you go back and you look at the spread between the 2 and 10-year and see what it's doing, you will be able to tell what the stock market is going to do six months out. We've done it. It works all the time. It's very accurate. And it's important for us when do these valuations of these trusts, and it helps us understand where these investments are going in the future.
So if you are concerned about fluctuations in the stock market, just take a look at the 2 and 10-year bond spread and track it, and you will find out what's going to happen in the future.
If you have any questions on this video, feel free to send me an email.