Opinion: Five stock market drivers in light of March Madness

To many Americans, March means college basketball and March Madness.

You may recall that arguably one of the most famous college basketball teams of all time was the 1991 University of Michigan team made up of five freshmen starters called the “The Fab Five.” In light of March Madness, we have put together a list of stock market drivers that we have labeled the “Not-So-Fab Five.”

1. Oil.

Clearly the debacle in the price of oil has negatively impacted the stock market.

What we are watching:

We would like to see oil above $35 for 35 days.

We would like to see a reduction in production. U.S. production, aka rig count, needs to come down. Inventory levels are too high. OPEC is having some production cut discussions. Already, we are seeing some of this developing.

Increases in mergers and acquisitions and bankruptcies are part of the bottoming process. This started in 2015, and we think will continue throughout 2016.

We also would like to see some weakness in the U.S. dollar as oil is highly negatively correlated with the dollar. As the dollar strengthens, the price of oil declines. (The dollar is recently off its high.)

2. China.

China has a significant impact on global economic growth and is in the midst of a mild cyclical slowdown. This is to be expected, but it tends to increase market volatility.

What we are watching:

We would like to see economic stabilization in the form of a Purchasing Manager’s Index greater than 50. (Really need to see evidence of recent monetary stimulus actions being beneficial to the economy.) Also a factor is weak manufacturing data in China – the PMI has been less than 50 for seven consecutive months.

Additionally, massive volatility in the Chinese stock market has been disruptive to global markets.

3. Recession.

Pockets of the economy are experiencing “rolling recessions,” but we do not think the broad U.S. economy will see a recession in the next 12 months.

What we are watching:

A yield curve slope remaining positive, however flattening, does not suggest a looming recession.

The Leading Economic Indicators Index is in positive territory and would need to turn negative for several months before we become concerned. Additionally, the Non-Manufacturing Index doesn’t point to a recession.

High-yield spreads also are off highs, indicating less stress in the economy.

4. Federal Reserve.

There is a risk of the Fed making a policy error. At this time, we think the probability of that happening is relatively low.

What we are watching:

Fed dot plots need to be aligned closer to the market’s expectations, which recently happened.

Also, stabilization of global financial markets, which the Fed is watching as an indicator of global economic growth and impact on U.S. economy. Markets have been firming up nicely, which should allow the Fed to continue to normalize interest rates.

5. Politics.

Elections cause short-term volatility.

What we are watching:

We are waiting for a clearer picture of the appointed nominees. The herd is thinning as each day passes.

Historically during election years, the stock market sees a volatile first half and a robust second half. This year appears to rhyme with the historical pattern.

Limited history of contested convention leads us to believe the Democrats will win the general election. At this time, the market doesn’t seem to care.

We anticipate positive returns in the stock market for 2016 with a near 5 percent total rate of return. Year to date, the market is performing in line with most historical election years, which typically exhibit a choppy first half and conclude with a robust second half, giving investors slightly positive returns in the stock market.

KC Mathews, a chartered financial analyst, is executive vice president and chief investment officer at UMB Bank in Kansas City. The bank operates two Springfield branches and a private wealth management center.