The Value Line Dow Jones Stock Evaluation Model: Is It Useful?

At the end of every year the Value Line (VL) Corporation publishes its forecasts of the Dow Jones Index and its probable ranges for the coming three years using a three explanatory variable multiple regression model that we call the Value Line Dow Jones (VL-DJ) model. The model is a static time series model. Therefore, forecasts of the Dow Jones Index rely on forecasts of the independent variables of the model. In this paper we examine the VL-DJ model for econometric soundness (balance, dynamic completeness, parameter stability, and economic plausibility) and examine, vis-à-vis an out-of-sample forecasting experiment, how useful it is for forecasting the Dow Jones Index from 1 – 6 years ahead when compared to a simple Box-Jenkins model of the Dow Jones Index. We find the VL-DJ model to be econometrically sound, the Transfer Function implementation of the VL-DJ model to be no more accurate than a Box-Jenkins model of the Dow Jones Series but that the “in-house” implementation of the VL-DJ model by the Value Line Corporation Staff has historically provided more accurate forecasts than those produced by the Box-Jenkins model we examined. Irrespective of forecasting accuracy, the VL-DJ model is of historical importance in explaining the movements in stock market indices like the Dow Jones Index. Earnings and dividend growth provide positive impetus to the growth in the Dow Jones Index while interest rate yields, as typified by Moody’s AAA Bond Yield, inversely impact its growth.