Before we begin, let's recall, as we did last week and the week before, what it was that we said three weeks ago in comparing what our S&P 500 forecasting model was projecting would be the apparent trajectory of stock prices for March 2016 versus what we predicted that they actually would follow:
That's also true for the projections for the remainder of March 2016, which suggest that stock prices are in for a rough ride before recovering. However, that apparent trajectory is really an artifact of the historic stock prices we use in our model to project their future trajectory, and as such, it is an echo of past volatility, which means that our model will be less accurate until that echo subsides....
So can we predict where stock prices are likely to go next?
Of course we can!... Provided investors keep their forward-looking focus on 2016-Q4 in making their current day investing decisions, we can expect that the S&P 500 will continue to track largely sideways (plus or minus 3% of their current value of just under 2000), through the end of March 2016.
Our override forecast, that the S&P 500 would be most likely to trade in range between 1940 and 2060 (or rather, 2000 plus or minus 3%) over nearly the whole month of March 2016 is still holding!
With just four days left to go in March 2016, we're content to let that predictive bet for the future of the S&P 500 continue to ride in Wall Street's casino as the clock for the month runs down.
That said, let's review the major market moving news from the Good Friday holiday-shortened fourth week of March 2016, starting with a recap of the news we previously covered for Monday, 21 March 2016 in our previous edition.
- 21 March 2016:
- Fed's Lacker says he is confident inflation will return to 2 percent - And now, the jawboning begins. The Fed is trying to reign in some of the impact of its previous announcement.
- Fed's Williams downplays soft U.S. market inflation measures: MNI
- Dollar rises as market moves past dovish Fed rate views - Reality check: Sooner or later, other nations adapt to minimize the relative advantage of a currency manipulation.
- Fed's Lockhart says rate hike possible at April meeting
- Stocks dip, dollar advances in wake of Fed comments
- Wall St. ends flat as recent rally spurs caution - Technically, stock prices ended up on the day, although by a small amount.
- 22 March 2016:
- Fed's Evans says he sees two rate hikes this year
- As Fed eyes two rate hikes, dovish Evans is no longer fringe
- Wall St. down but pares losses after Brussels blasts - Someone is already likely checking up on this hypothesis, be we think that incidents of terrorism are having less and less of an impact on markets - not that they ever had much of an impact to begin with.
- 23 March 2016:
- Bullard Says Jobless Decline May Warrant Faster Rate Hikes Later - the relative impotence of terrorists quickly becomes clear when compared to the market moving power of the St. Louis Fed president.
- Wall Street rally fizzles out as oil, materials fall - Or, as Bullard intended with his comments, stock prices fall. This is how Fed officials use forward guidance to move markets - they focus investors on a particular point of time in the future, and stock prices adapt accordingly, or rather, their values change to be in tune with the expectations for dividends that will be earned at that particular point of time. Although Robert Shiller would call these kinds of changes in stock prices "irrational", it really does reflect an underlying order in the chaos of how stock prices behave, with investors rationally responding to new information as prescribed by Eugene Fama's theories, with the magnitude of the movements corresponding to the relative distance between where stock prices are with where the expectations associated with the alternative future point of time would place them. So far as we know, we're the only ones to ever develop a coherent theory of how stock prices work that successfully reconciles the otherwise conflicting Nobel-prize winning theories of both Fama and Shiller.
- 24 March 2016:
- Another U.S. rate hike may be around corner: Fed's Bullard
- Wall St. closes flat, five-week rally ends - but not as low as you would think. That suggests that investors aren't completely buying what Fed officials are selling. Certainly not another rate hike in April or June 2016 as yet, which we would see in the form of stock prices being driven considerably lower. We think that investors are looking at 2016-Q3 as being more likely for the timing of the Fed's next rate hike, but we don't yet have clear signal to differentiate it from 2016-Q4.
As for getting a clearer signal with our futures-based model of the S&P 500's stock prices, we should have that by the second week of April 2016.
Update 30 March 2016: Dammit, Janet! It looks like Janet Yellen's dollar weakening and new QE-hinting statement yesterday, which completely contradicted the scenario that other Fed officials had been trying to sell, prompted stock prices to rise to where the S&P 500 might poke above the 2060 mark as early as today as her statement succeeded in fully focusing investors on 2016-Q4. Now, simple noise would be enough to push stock prices over that mark, which would break our nearly month-long prediction streak. Just how seriously did you screw up the whole rate hike thing, U.S. Federal Reserve?!
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