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Correlation of the National Debt with the Dow Jones Industrial Average (DJIA)Correlation of the National Debt with the Dow Jones Industrial Average (DJIA) The following discussion will show that there exists a strong correlation between the size of the United States' national dept and the value of the DJIA. It will also be shown that it may be possible to use this correlation to predict how low the DJIA will fall during a market correction. To accomplish this, we will examine the market correction of 1987, 2002 and the possibly current one of 2007. I first noticed the correlation between the size of the national debt and the DJIA during 1995 and was surprised at how using the national debt to predict the DJIA seemed to explain the market correction of 1987. However, this was an explanation found after the fact and could have been a fluke. Therefore, when the market began to turn downward in 2002, I dug the numbers back out, updated them and performed new calculations to see if I could predict where the DJIA would end up in 2002. I ended up predicting it would fall to around 7500 to 7600. I told my prediction to just one person and he thought my predicted value was far too low. However, when the DJIA fell to its 2002 low of 7286.27, I began to think the model might in fact have some predictive value. Therefore, before the market can fully correct itself this time around, I am presenting my analysis publicly for all to see. The proof, as they say, will be in the pudding. It should be pointed out from the start that the size of the national debt in and of itself would not seem to be a good explanation of movement in the DJIA. However, the national debt does appear to be a good "catch all" variable for explaining movement in the DJIA since the national debt is highly correlated with many other economic variables such as Gross Domestic Product and inflation. A proper analysis would attempt to sort all of the many variables out and include them in the prediction equation. I'm sure such attempts have been made in the past by other people, but for our puposes here we will simply use the national debt as a dummy variable to fill in for all of the other variables with which it is correlated.

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