Business Economics Investing

The Complexities of Uncertainty

It’s been an interesting few days with rates moving higher at a fairly rapid pace, at least relative to what we’ve seen in the past several years. People get caught up in absolute rate levels as if there’s some magical threshold that tips the pendulum into unfavorable territory for stocks. That magical rate level may exist but my experience has been that the rate of change in interest rates tends to be far more impactful on stock performance than an absolute rate level being achieved is. So not surprisingly, the recent increase in rate volatility appears to have at least partially contributed to the poor stock performance we’ve observed.

Clearly there are a lot of variables that contribute to market movements, which are nearly impossible to pinpoint. Understanding the bigger picture is critical, especially at a time when unprecedented loose monetary policy continues to reverse in a tightening trend. The S&P 500 hasn’t broken its long-term trend, the economy is still on stable footing and earnings are still expected to grow by quite a bit. Of course, this is all known and priced in at this point, so any break or fear of a break in these trends would weigh on stocks. An argument could be made that all the potential negative news (trade wars, slowing global growth, tightening monetary policy, etc…) is also known and priced in so any break or anticipation of a break in those trends would be a tailwind for stocks. .

We could probably debate this until we’re blue in the face and not arrive at any better conclusion or make any better decision than just hanging tight for now to see how things unfold over the next several months. When faced with uncertainty, often times the best thing to do is nothing as we usually aren’t very effective at processing the complexities of uncertainty. And who knows, this all could be something as simple and easy to explain as a typical pullback in an up trending market (i.e., a buying opportunity).