Why do markets hate uncertainty?
Markets hate economic uncertainty. While it creates volatility, it is often not the good kind.
What I mean by “bad” volatility is when it is driven by the latest news headline in a market that lacks confidence in its expectations of the future economic outlook. It also forces a scale back in risk as indicated in this Reuters headline’
Hedge funds unwinding risk as in early days of COVID, Goldman Sachs says
Businesses hate an uncertain economic outlook as it makes it difficult to plan ahead with spending, investment and hiring decisions.
Consumers hate economic uncertainty as it can undermine confidence in what may lie ahead, such as the pace of activity, prices and job security. The latter is especially true currently if you are a federal employee. In any case, economic uncertainty will likely impact consumer spending.
From a trader’s perspective, markets trade based on expectations of future economic performance. This is what forms trends where the consensus outlook is constantly reevaluated by the latest string of economic data.
The current outlook
The best way to describe the current outlook is uncertain. It is complicated by President Trump’s on again, off again tariff comments and threats , deadlines. that either get pushed back or actions on that date modified, and retaliation by other countries. .
This, in turn, runs the Crisk of unintended consequences, such as retaliation morphing into a global trade war. An example is a headline that China hits back at Canada with fresh agriculture tariffs.
Markets hate uncertainty
As I said markets hate uncertainty. It is no wonder that stocks have cratered as recent data shows signs of the economy slowing. This has seen several banks downgrade forecasts for the U.S. economy and markets price in three Fed rate cuts thus year from expectations of one just a few weeks ago.
Here is the point. I doubt that many have confidence in how President Trump’s tariff soap opera will eventually play out. This is why it is hard to have any degree of confidence in market expectations on the economy and how the Fed will respond
More questions than answers
Will the impact on tariffs throw the U.S. economy into a recession?
Will sticky inflation and sub par growth result in stagflation?
Will tariffs be a temporary event where a slowing economy proves to just be a bump in the road?
Notice that I only focused on tariffs as there is a lot more going on that adds to uncertainty. This includes DOGE job cuts, the upcoming US funding deadline, extending tax cuts that would increase the deficit to name a few and the geopolitical concerns following a shift in U.S. foreign to name a few.
To sum up:
- Businesses hate uncertainty
- Consumers hate uncertainty
- Markets hate uncertainty
The common threat is Trump’s ever changing tariff policy. Until the dust settles and fallout assessed, expect more volatility until markets are able to come up with a consensus over the future economic outlook. In the meantime, markets will factor in the worst case and adjust expectation as events unfold.
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