Economic Uncertainty = High Risk = Fear

A well known investment principle is that increased volatility equals increased risk. Another well accepted principle is that uncertainty or the unknown increases fear. High risk and uncertainty creates fear and, sometimes, panic.

These principles apply more than to investments. When the political winds change, there is uncertainty. When the political winds are blowing in an adverse direction, defensive positions are often taken. In both cases, it is difficult to plan the future because there is not enough information to predict the future and to develop business or personal plans amidst uncertainty.

One simple example is taxes. If the tax codes might be changing, major decisions are often deferred until the new code is written and the tax attorney can give advice. If there is concern that the tax code may become adverse, the tendency would be to take a taxable event now (spelled “sell”) rather than risk higher taxes by selling later.

When an investor is panicking, they often sell. When they are fearful, they either move to cash or simply move to a wait and see attitude. Neither of these responses leads to an improving market.

When an employer sees risk or becomes fearful, they often freeze expansion, reduce the workforce in anticipation of a downturn, or simply stop hiring to wait to see what will happen.

What do you see on the horizon? Do you see uncertainty and storm clouds brewing or a beautiful rainbow?

What are you seeing in the marketplace? Are companies hiring more or less? Are insiders investing or deferring? Are companies buying more products or trying to manage with less?