Probable Versus Possible

Includes: SPY
by: Roger Nusbaum

In the context of participating in incidents with the fire department, I tend to think of things as being probable or merely being possible. For example, a week ago yesterday we had a small wildfire on a hill that was surrounded by houses. Based on the time of the year, the lack of wind, the footprint of the fire when we got there (which was pretty quickly) and that we had 17 people respond to the call, it was not probable that the fire was going to explode into a catastrophic loss of six or seven houses. Of course it was possible that it could have gotten away, anything is possible with a wildfire and this same type of incident occurring in June would have been much more of a threat to turn into something horrible but as it turned out a bad outcome was not probable and the probabilities worked in our favor.

A reader left the following comment on a post of mine that was run at Seeking Alpha.

...That's why I'm waiting for return to 400-600 on the S&P to ride the coaster from the bottom up...

To me, this raises the exact same issue of probable versus possible. Of course it is possible for the S&P 500 to make a new low versus the March 2009 low but it is not probable. Getting to 666 on the SPX took a combination of the "worst financial crisis in 80 years" and an overall sentiment that was still favorably disposed to stock market participation and generally trusting of the system.

In other words, most participants did not see that bear market/crisis coming. To believe the S&P 500 could go down that low again is to believe that whatever could be coming would be worse than the financial crisis of 2008 and somehow be even more of a blindside hit to the market (this last comment assumes that the public is less trusting of markets than it was five years ago).

This is not a Jim Paulsen/Brian Wesbury argument that nothing is wrong or that the market can't go much lower because there are serious structural problems and large declines are always possible. We know that this cycle will end at some point and when it does there will be a large decline. But the idea that it could be worse and catch more people by surprise is not probable.

The federal government isn't functioning normally, we are not creating jobs at anything close to a normal pace, GDP growth has not recovered anywhere close to normal, debt is mushrooming, the U.S. is not a AAA credit, housing is stumbling along a bottom and trust of the financial system has eroded. You can probably come up with several more current issues but none of them carry the surprise factor of a housing market that "can never go down" actually cutting in half (as it did in some markets).

New lows in the SPX are possible but they are not probable.

Since this post is somewhat fire related the first picture is from the Rupert Fire here a couple of years ago (taken with my phone). The second picture is a look at the panel of Engine 86 via the side mirror. The final picture is my favorite old truck from the Hall of Flame museum in Phoenix. I've been to a few of these fire museums and the one in Phoenix blows the others away by a mile.