DEFINITION of 'Rule Of 18'

A rule whereby the sum of the inflation rate and the P/E ratio of the Dow Jones Industrial Average is an indicator of the direction of the stock market. If the total is above 18, stocks are supposed to decrease. If the total is under 18, then the stock market is expected to increase.

BREAKING DOWN 'Rule Of 18'

For example, if the P/E ratio for the Dow were 14 and the annual inflation rate were 3%, their sum would equal 17. This number would indicate that the stock market will increase.

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