1 Thing Stocks Hate More than Bad News

Markets Do Worse with Uncertainty than they do with Bad News.

Uncertain Woman
Uncertain Woman. Ron Krisel

Clarity is king.  There is something which the stock market hates more than bad news, and that is uncertainty.  While negative results or data can derail investments, an ongoing lack of clarity can absolutely bring stocks to a stand still.

This is why you may see some uncertainty get lifted, and even though the underlying event is a negative one, the involved shares will spike higher.  The act of clarification, whether positive or negative, has a very helpful impact on shares.

Everyone wants to know what they are dealing with, and investors are certainly no exception!  In fact, stock market traders typically prefer the "Devil they know" over the "Devil they don't."

Said another way, fear of the unknown in the stock market is almost always more disastrous than the actual reality of the event.  Any time most people aren't certain of how an event might play out, it gets treated as a worst-case scenario.

For example, if there is a debate about which candidate will win the Presidency, you will be dealing with some pretty significant uncertainty.  If candidate A wins, it will have an entire host of results which will be different than if candidate B is victorious.  This does not imply that one would be better than another, but it does speak to the fact that many parts of the economy, not just stock market investments, will be partially on hold until the result is ratified.

A Presidential result is a pretty significant example, and would have a big impact.  There are of course many other levels of varying uncertainty, each with their own "relief rally" recovery when the smoke clears.

We've seen such situations many times over the years, and there even seems to be a build-up in many of them in more recent times.

 The Federal Reserve might raise interest rates, the Greek economy may not get a deal with the International Monetary Fund, China may further devalue their currency, the Eurozone economy may fall apart...

The most serious types of uncertainty involve significant issues which are beyond our control.  Uncertainty is bad, but lack of control of an uncertain event is so much worse.

Consider Russia's invasion of Crimea, or China's posturing in the South China Sea, just as a couple examples.  The eventual outcome is very much beyond our clarity and vision, and unfortunately there is not really much we can even do about it.  We will have to live with the uncertainty... a result which almost ensures that the situation will have a stalling effect of certain portions of the economy and stocks.

In general, any time you hear the words or phrasing which includes terms such as, "might," "possibly," "could," or, "is likely," then you will be dealing with uncertainty.  The longer that lack of clarity plays out, the more damaging the effects will be upon whatever underlying stocks upon which it has an effect.

There is a bright spot, however.  An opportunity, actually.  By predicting which shadows of uncertainty will clear up, you may be able to identify some investments which will benefit from the subsequent "relief rally."