March 2016 Monthly Outlook – Dealing in Probabilities

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.

3.1.2016_MONTHLY_OUTLOOK_CHART

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.

Market Update 2/11/2016

The volatility in the financial markets is continuing. The most recent catalysts are –  accelerating concerns about global growth fueled by oil’s continued decline, credit concerns with European banks, and the Japan Central bank instituting negative interest rates.  Add in some additional geo-political news like North Korea launching a “satellite” and the Zika virus spreading,  and you get a panic in the markets.

Here is an interesting thought from Gavial Organization – “when markets go up for no adequate reason that behavior is usually described as irrational herd instinct but when markets collapse for no good reason everyone assumes that investors must know what they are doing and have discovered some hidden horror even though no one can describe what that is”

I continue to feel that the fundamental economic picture, especially in the US is not dire.  Having said that, the market deals in its own reality which right now is extremely pessimistic.  As of 12:00 EST 2/11/16, the S&P 500 (my preferred measure of the equity markets) has breached my support target of 1,850 – 1,867 but has maintained major support in the 1812 – 1820 range. As such I am now making adjustments to portfolios to lower the amount of equities.  Please note: the current situation still does not call for selling all equities but rather reducing exposure.  The reason being that markets can turn on a dime, from up to down as we are currently experiencing, and from down to up.  The chart below (courtesy of BlackRock) shows the best strategy for the long haul is to stay invested.

FEB_UPDATE

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

Please consider the charges, risks, expenses and investment objectives carefully before investing. Please see a prospectus containing this and other information. Read it carefully before you invest or send money.

Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.

February 2016 Monthly Outlook – Growth scare or Bear market?

February 2016 Monthly Outlook – Growth scare or Bear market?

 Growth Scare or Bear Market?

The depth and speed at which the stock market (basis S&P500) has fallen in January 2016 has many wondering if we are headed into a Bear market for stocks.  Generally, bear markets are defined as a decline of 20% from the previous high.   While some individual stocks, specifically in the oil/gas and manufacturing sectors are in a bear market, the overall S&P500 Index is not.  So are we having a growth scare or are we heading into a bear market?

It’s worth putting the recent decline into perspective.  First, the S&P 500 Index had risen 206.5% from the 2009 low of 666.79 on 3/6/2009 to the 12/31/15 closing of 2043.94 (source: Yahoo Finance)

Second, we have seen an extended period of limited volatility in stocks.  Since the market bottom in March 2009 the S&P 500 experienced 10 major sell-offs with an average decline of 10.56% and duration of 64 days (source: Raymond James). The fact is that while these sharp sell-offs may seem to be more pronounced and scary in our modern world  of 24/7 media coverage and Apps, they’re actually not as rare as you might think. To this point, Ben Casselman of Fivethirtyeight.com did a fantastic job of summarizing recent events: “Set aside the psychological importance of the New Year and what we’re really talking about is a market that lost 9 percent in 12 trading days (as of the end of 1/20/2016). That’s hardly unprecedented. We had equally bad 12-day stretches in 1950, 1955, 1957, 1962, 1966, 1970, 1973, 1974, 1978, 1979, 1981, 1987,1997, 1998, 2000, 2001, 2002, 2008, 2009, 2011 and 2015. That list includes some brutal recessions and memorable crashes, but also several incidents that proved little more than blips.”

So, bottom line, I am still very cautious on stocks and wouldn’t be surprised to see the market decline back into the 1,820 – 1,867 range on the S&P 500. I do expect volatility to remain elevated which will likely limit  full year gains on the S&P 500 to the low single digit range.

2.1.2016_MONTHLY_OUTLOOK_CHART_1

The other reason I don’t foresee a bear market for stocks is that bear markets are usually accompanied by recessions.  Yes, parts of the world, especially countries that export oil like Russia, are in recession.  Even parts of our own economy, those tied to oil/gas and manufacturing, are close to recession levels.  However, overall U.S. and Global economic growth is modest but steady and inflation is low.  US and European consumers are bright spots as employment is improving and consumer sentiment is positive.  Chinese and U.S.  manufacturing are soft spots.  The decline in oil prices is primarily due to oversupply and not to declining demand.  I expect the oversupply to dissipate over the next 18 months.  The chart below, courtesy of Oppeheimer Funds, nicely depicts where I feel we are in the economic cycle.  I agree that we are likely in a period of moderate economic growth, that barring any unforeseen events, should continue throughout 2016.

2.1.2016_MONTHLY_OUTLOOK_CHART_2

Here is a link to my appearance on Fresh Outlook on 1/30/16 discussing the economy and financial markets:

https://youtu.be/umbgexqwgTA

February Calendar of Events   (comments and additions for future months are always welcome)

  • February is Black History Month.  Let’s all strive for understanding and acceptance for people of all colors.

February  2nd                   Groundhog Day – let’s hope he sees his shadow

February  7th                  Super Bowl – call me sentimental but I hope Denver wins and Peyton Manning retires on top

February  8th                  Chinese New Year – the Year of the Monkey

February  9th                  Mardi Gras

February  10th                Ash Wednesday

February 14th                  Valentine’s Day

February 15th                  Presidents Day

 

Sources: Raymond James & Associate, Yahoo Finance, Oppenheimer Funds

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

Please consider the charges, risks, expenses and investment objectives carefully before investing. Please see a prospectus containing this and other information. Read it carefully before you invest or send money.

Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.