It’s a Coin Toss on Stock Market Meltdown this Year

Statistics are a peculiar branch of mathematics and, as we’ve seen in the recent presidential campaign, they’re easy to abuse. Perhaps the most deceptive statistic of all is the 50/50 chance. That statistic is slippery because even odds can also be expressed by saying either an event will happen, or it won’t. It’s the ultimate hedge bet that comes pre-mixed with a generous amount of deniability. On the other hand, suggesting there’s a 50/50 chance of a stock market correction by the end of 2016 is a little more definitive, and worrisome, than saying something might or might not happen someday.

Chad Morganlander, portfolio manager at Stifel Nicolaus, gets paid to watch the market. So when he suggests there’s a 50/50 chance of a market correction, a market drop of more than ten percent, he means in less than three and half months. He sees uncertainty as the primary driver of this potential market correction, and there are several factors feeding that uncertainty currently.

The Election

Few elections have so clearly demonstrated how divided we are as a nation as the 2016 presidential race. Thus whoever ultimately wins will take office with extremely high negatives and a record level of mistrust. A paralyzed and divided electorate isn’t just inconvenient; it represents a significant threat to our economy. This dysfunction has already left permanent scars, robbing our nation of vital infrastructure investments, and bringing aspects of our legislative process to a standstill. Not only does the current political climate undermine commerce, it guarantees low growth for decades into the future.

The Fed

The Federal Reserve is another source of uncertainty for the markets, though we should find out soon whether we’ll get a rate in hike in September or December. The markets have been hyper-reactive to any suggestion the Fed will raise interest rates, even though a quarter-point bump should be priced in by now. A hike in September would be a hawkish sign that the Fed might raise again in December. If that happens, then the odds of Morganlander’s projected stock market correction shoot way above 50/50.

Oil’s Slide

We’ve been talking about oil’s impact on the economy for nearly a year now because low oil prices have been battering domestic oil producers. Prices finally inched up over $50 and it looked like U.S. producers were going to limp through the worst of it, but then supplies surged once again and prices dropped. When prices drop, domestic producers, who have higher costs to get oil out of the ground, cut back on the number of wells pumping.  The number of operating rigs has dropped precipitously, and at these prices almost no additional exploration or extraction projects are being funded.

Unless we end the constant bickering, put a stop to the attitude that “compromise” is a dirty word, and start working on the big issues, America is going to continue its slide toward third world status. We desperately need tax reform, to have our cuts to military spending not dictated by sequester and to stop seeing the other party’s candidate as the incarnation of evil. Right now it doesn’t look good for any of us. Our odds of facing a major market correction are 50/50 today but, if we don’t start working on our big problems, we’re going to be facing much tougher odds.