As I sit here on the shore of the Chesapeake Bay, I know there will be a high tide twice a day. If I watch TV, I will know the exact times of the tide. It is so predictable.
As I watch the stock market, I recognize the same tidal changes, as the level of uncertainty go up and down. As uncertainty about the election decreased, as uncertainty about the Q3 economic performance decreased, and uncertainty about the Fed’s quantitative easing decreased, the stock market has been bullish the last several months.
Over the last week, the tide of uncertainty has begun to rise again. Will the Fed be able to maintain its quantitative easing in the face of withering criticism abroad and at home? Will the Bush and Obama tax cuts be extended or not? Will the problem now becoming apparent in Ireland cause the same damage that the problem in Greece caused earlier this year? Will the surging inflation in China cause their government to stifle its growing demand for the world’s resources?
It is often said that the market is always climbing a Wall of Worry, but that implies a predictability that doesn’t exist. Likewise, the market is usually quite bullish this time of year, but that is not a certainty and is easily de-railed by a tidal change in certainty and uncertainty.
Changes in the level of uncertainty will always occur, changing the market. The unpredictable part is whether the change in uncertainly will be long-lasting and profound . . . or just another tidal change.