Rule Of 18
Categories: Metrics
It’s that time again, so we don our tiara, fasten our cape, and step out onto our balcony to address the masses. A hush falls over the crowd as thousands of eyes turn toward us. “We believe,” we say loudly in our most regal voice, “that the stock market will…go up.” We give everyone a thumbs-up sign, the crowd cheers, and we disappear back into our apartment and change into our comfy pants.
What are we, some kind of stock market swami? Not really; we just pay close attention to the Rule of 18, and then we tell our adoring public what it tells us.
The Rule of 18 an informal guideline we can use to determine whether the stock market is about to go up or go down. We add the current inflation rate to the Dow Jones Industrial Average’s price-to-earnings ratio; if the result is below 18, the stock market is likely to increase. If it’s above 18, the stock market might be about to go down.
Is this a 100% foolproof technique that can make all our financial dreams come true in a matter of months? Nope. Such a thing does not exist. The Rule of 18 is just one more tool we can add to our investment toolbox, and use to guide our financial decisions.
