Markets hate UNCERTAINTY.  I get questions all the time when a new administration takes over and starts changing things, or when a bill is moving through Congress, or when world events seem overwhelming.  What is likely to happen and what should I do to protect myself?!  The answers are usually easier than they seem… “Who knows!” and “Likely, nothing”.

The very definition of uncertainty means what is likely to happen is… (drum roll)… uncertain.  We can try to assign probabilities to events, but how the market responds to those events is another uncertainty.  This layer on layer of uncertainty makes predictions challenging and fraught with potential error.  As an example, when Federal Reserve chair Jay Powell was asked recently about the potential impact of tariffs, his core response was “… the range of possibilities is very very wide … we just don’t know and I don’t want to start speculating…”.  This is the leader of the most important central bank in the world with arguably much more information at his disposal than we will ever have at ours.

So if it is challenging at best to make predictions, uncertainty reliably leads to VOLATILITY in the stock market.  This is a known and predictable outcome.  Notice that volatility is different from “decline”.  Volatility means the market moves more than it typically does and will likely move in larger chunks in shorter periods of time.  It means, in other words, strap on your seat belt and get ready for a bumpy ride.

But while higher volatility is reliably predictable, the direction, scope and duration of those movements are not predictable, so taking action in the midst of volatility is again, fraught with potential error.  I often get the question of whether we should just step to the sidelines (i.e., get out of the market) and wait until it is over.  OK, but tell me if you would… when will the uncertainly and volatility end?  When should we get back in?  Are you prepared to pay the taxes necessary to sell?

We have to step back and remember that this is not our first rodeo; not the first period of uncertainty we’ve ever faced.  I would invite you to read my previous post “In All Of Time” to gain some perspective.  In fact, look back eight years and think about what has happened during that time.  An unexpected election outcome leading to four years of less certain output from Washington (including new tariffs), a global pandemic, two regional wars, periods of high inflation and sharply rising rates from the Fed (and a national championship for THE Ohio State Buckeyes!) … just a name some highlights.  Let's look at the numbers from 2017-2024; from 12/31/2016 through 12/31/2024, the S&P 500 was UP 162.7% or 12.8% per year[1], actually above its historical average.  We certainly experienced some ups and downs during that period of time, but those that rode it out were rewarded.

Markets that move around are also a source of OPPORTUNITY.  We only get a chance to “buy low” when markets are… (drum roll)… low.  Even normal portfolio maintenance activities give us the opportunity to take advantage of the market’s gyrations.  We can potentially take tax losses to offset future gains.  If you are adding money to your portfolio (like your regular 401(k) contribution, for example), you buy more shares when the market is lower.

Remember that your portfolio is not one thing; you need to think of your portfolio as being made up of multiple “buckets”.  For those of you taking money out in retirement, your full portfolio will not be in stocks – so that the money you need in the short term is not exposed to stock market level risk.  Only truly long-term money is exposed to stock market risk and that provides us the time we need to take advantage of the opportunities that market volatility gives us.

Which brings me to the final point.  Standing true to your investment goals is hard to do when the markets are bouncing all over the place, but history should help provide us the perspective we need to breathe easy and know that over the long-term markets have always recovered from whatever market events have occurred.  This perspective should give us the PATIENCE to live through whatever the market (or Washington) throws at us next.

The bottom line: Strap in and Invest With A Plan.

[1] The Standard & Poor’s 500 index is a market capitalization-weighted index of 500 leading publicly traded companies in the U.S.  You cannot invest directly in an index.  According to Yahoo! Finance, the closing value of the S&P 500 on 12/31/2016 was 2,238.83; on 12/31/2024 it was 5,881.63.  Past performance is not indicative of future results. Investments are subject to market risks including the potential loss of principal invested.

Image: Uncertainty and Doubt by Gordon Dylan Johnson, via OpenClipArt, used under CC0 license