These three events are what every investor should be watching closely. What happens with each will determine if stocks head up, down, or sideways in March, and if you keep a close eye on them will know if it is time to start buying stocks before the market rallies.
“Beware the ides of March” – Julius Caesar, William Shakespeare
It has been a rocky start for investors in 2016. January opened with deep losses during the first two weeks of the year before stabilizing somewhat towards the end of the month. Still, the S&P 500’s 5.1% decline in January was the 10th steepest drop for the month on record. The first two weeks in February again brought heavy losses before the market seemed to find a floor for the moment and rose to end the month largely flat, at least as far as the major averages are concerned. However, sectors within the market like energy, biotech, small caps, transports and emerging markets are all in bear markets; some of them quite severe.
So what will the beginning of March bring? I am watching three key items that could determine the direction of the market for the coming weeks and months.
High-Yield Credit Markets:
One of the major headwinds to equity performance in 2016 is the deterioration in the high-yield credit or “junk bond” market. New junk bond issuance has dried up to a trickle as total issuance is down some 70% from the same period a year ago. Most of the spike in volatility and yields in the junk bond space has been due to the accelerating rate of defaults from small and even mid-tier energy producers blindsided by the severe decline of both oil and natural gas over the past year and a half.
This fear has impacted almost every segment of the market and economy that depends on this type of credit. This includes small biotech concerns that have been hammered over the past six months as the market frets over developmental concerns not being able to raise capital to fund trials, or will have to pay a much steeper price to access these markets and the financing they provide. This has also impacted homebuilders, which tend to carry significant debt within their business models. Many are down 30% to 40% from their highs this summer even as housing starts in 2015 had their strongest year since 2007.
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