Is uncertainty a friend or foe?


Surprise parties would surely be less fun without it, and life would generally be more boring if all outcomes were known in advance. And, while capital markets react negatively to increases in uncertainty, it is that very same absence of clear outcomes that makes the capital markets possible and worthwhile in the long-run. Unpredictability is what causes prices to fall, but is also indirectly what drives prices to rise when positive news develops, and excessive concern dissipates.

As we approach the end of 2016, we can look back over the last 12 months and see how some surprises affected the market. Continued tepid global growth, the first Fed rate hike since 2006, Brexit, potential additional interest rate hikes, continued unrest in the Middle East, and other factors contributed to a bumpy market period after an unusually strong and long post-crisis recovery market, partly fueled by low rates.

But wait, 2016 isn’t over. September and October have a reputation for stock market volatility and there are plenty of catalysts to consider. For example, we may see surprises in economic data; US rates might still see increases, Central Bank policies abroad could soften, political polling ahead of the Italian constitutional referendum which could indirectly lead to the death knell of the euro, and other factors, including of course… the U.S. presidential election.

Neither the outcomes of the above nor the market’s reactions can be predicted. However, it is important to embrace uncertainty, given that fleeing or chasing returns often leads to worse outcomes in the long-run. If you have significant spending plans in the short-run, that money should already be out of the market, whereas money for long-term spending is best left committed to your long-term strategy.

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