March 2016 Monthly Outlook – Dealing in Probabilities
Dealing in Probabilities
Investing is an inherently risky business. As there is no way to accurately predict any particular outcome, my approach is to deal in the probabilities of various potential outcomes. For example, you have likely been hearing more on the news that the U.S. economy is surely headed for a recession. While recent economic data has softened, I still don’t see any eminent signs of recession. The consumer, who accounts for 70% of the economy, is in decent shape (interest rates are low; job market remains strong; salaries are finally rising; disposable income is higher due to lower gas prices). The offset is the industrial sector, specifically the oil patch, which is seeing significant contraction due to oil prices. I also factor anecdotal data into my process. It has been said that when everyone is asking the same question, it is usually the wrong question, therefore all this noise about recession may be the wrong question. So right now I put the probability of a recession in the U.S. at 35% but rising slightly.
Frankly, recessions are harder to predict than the stock market. Especially now, as the global economy is so intertwined. Generally, recessions give rise to bear markets in stocks. Having said that, you do not need to have a recession to have a bear market in stocks. Indeed, since 1968, the S&P 500 has had 10 bear markets (a 20+% decline), but four of them were not accompanied by a recession. So, measuring from the May 20, 2015 intraday high (2134.72) on the S&P 500 into February 11, 2016’s intraday low (1810.10) puts us in a ‘correction’ (-15.2%) and not a “bear market”. Here again, probabilities come into play. There are signs that the stock market has bottomed, as it has rallied 7.8% from the 2/11/16 low to close above a critical resistance point of 1,950 on 2/25/16. However, the stock market is still in a downtrend as it is down 8.6% from the 5/20/15 high to the close on 2/25/16. (source: Raymond James & Assoc, Yahoo Finance) So the question is, does the rally continue or does the 1,950 level on the S&P 500 prove to cap this rally as it has done 5 times already this year. My job is to determine if the potential upside justifies taking on the potential risk in equities. I put the probability at 50/50 the rally continues at this point.
This coming week should provide clarity. The February employment report is due Friday March 4th. Here is an interesting statistic (courtesy of Raymond James & Assoc)
Early March tends to provide the bulls their best historical chance at a rally. Here are the annualized returns for the first five days of March since 1950 on the S&P 500:
March 1: +68.37%
March 2: +8.71%
March 3: +27.41%
March 4: +46.98%
March 5: +29.00%
Finally, Happy Leap Year! The news on this 29th of February hasn’t been good – the Eurozone dips into deflation, China cuts bank reserve requirements for the fifth time, European shares fall on G20 disappointment. Probabilities – Probabilities!
March Calendar of Events (comments and additions for future months are always welcome)
March is Women’s History Month. Please says thanks to all the important women in your life.
March 8th International Women’s Day
March 13th Daylight Savings begins – Spring forward
March 17th St Patrick’s Day
March 20th Spring begins in US – I’ll believe when I see it
March 23rd Purim begins – holiday which commemorates the Jewish people being saved from extermination in Persia.
March 27th Easter Sunday
I hope you find this report informative. Please share it with anyone who you feel could benefit from the information.