One can get a perspective on the historical level of the S&P 500 vs. the Industrial Production Index by comparing the two across several business cycles. S&P 500 (S&P Indices:.INX) appears to have much higher to go in future years. There are two charts below which help to provide perspective.

The chart below compares the S&P 500 (S&P Indices:.INX) vs. Industrial Production Index(IndPro) from 1978-Present. From this chart one can see that the major peaks of the S&P 500 S&P 500 (S&P Indices:.INX) occur simultaneously with the major peaks in IndPro. Using this as our jumping off point we then go to the IndPro chart to estimate where the IndPro is relative to its historical trend.

The next chart is the history of the IndPro from 1939-Present. In this chart I use a Logarithmic scale which lets one draw and measure a growth trends. One does this by observation. There is an identifiable growth trend from the early 1970s to the Present which is ~2.4% annually. The IndPro cycles with the business cycle to form a lower level trend level during recessions and an upper trend level at economic highs. Together these trend levels form the IndPro Trend Channel which we can use to estimate where we are currently in the economic cycle.

Note: IndPro does not measure all the business activity in the US, it only measures Industrial Production(Mfg, Utilities, Mines)

Currently, IndPro is still trending at the lower range of its Trend Channel. If we calculate where the upper level is for the Trend Channel May 2013 we get a value of IndPro = 115 which is plotted on both charts. If we calculate where the upper level can be 5yrs from today we get a value of IndPro = 129 for May 2018.(IndPro = 129 is not plotted because it would distort the charts)

Upper Trend Channel Estimates for IndPro:

May 2013 – 115
May 2018 – 129

Based on the IndPro trend of the past ~45yrs which has been very consistent I make the assumption that this trend is most likely to continue. What is impossible to do is to predict with any precision when IndPro will rise to the upper level of the IndPro Trend Channel. But, we can take away from this study that history indicates that IndPro is very likely to grow over the next several years to a level well above today’s level IndPro = 99.04. If the IndPro recovers to the historical high level of the Trend Channel, then there remains considerable room for the SP500 to rise from current levels in my opinion. My research indicates that this is what is likely to occur.
Note: There is a noticeable break in the IndPro trend which occurs late 1960s to early 1970s. There are a number of social programs as well as outsourcing manufacturing to Japan and other lower cost mfg countries which began at this time which may be responsible for this change. The current economic environment shows signs that the outsourcing trend may be reversing.

I hope this presentation helps to explain more fully the relationship between US IndPro and equity prices. The relationship is not precise, the trends follow each other relatively closely in time and general magnitude even if we cannot predict with certainty when either will hit its peak nor can we predict with certainty the SP500 price or the IndPro index level. What we can say is that IndPro remains at its historical low levels and that significant growth to the upper level looks to be yet ahead. The S&P 500 S&P 500 (S&P Indices:.INX) historically follows IndPro.

Optimism remains warranted.*