Market wise, uncertainty is always bearish. Investors, traders and agricultural producers do not want surprises. They are uncomfortable with the unknown.
Yet in recent weeks, uncertainty abounds. It is blanketing every market on the board.
The entire Big Four — stocks, bonds, currencies and commodities — are facing uncertain times and as a result, markets are struggling to rally and hold gains. Values have been heading south.
The Wall Street Journal posted a headline a few days ago stating, “U.S. Dollar and Mexican Peso Fall on Election Uncertainty.” The first paragraph read: “The dollar and the Mexican peso tumbled Tuesday as new polls indicate an increasingly uncertain outcome for the U.S. presidential race.”
What the WSJ was referring to was the fact the ‘ol greenback hit an eight-month high a few days ago, but suddenly did a nosedive. The peso followed suit.
Historically, when the dollar shows unusual strength such as hitting an eight-month high, it tends to support commodity prices per se. But the CRB Index, which is to commodities as the Dow Jones is to equities, was not supported when the dollar did a nosedive.
The CRB, in tandem with the dollar, moved south, hitting a six-week low. And why, you ask, did the CRB take a beating along with the dollar? The CRB declined out of fears of uncertainty.
History also shows that bond prices tend to rise when stocks and commodities move lower. Bonds do best when doom, gloom and uncertainty is the norm.
But this week, as markets of all kinds succumbed to the laws of gravity, bonds moved lower, as well with futures hitting a six-month low. The debt markets turned sour because of uncertainty.
Less than three weeks ago, natural gas prices rallied to a 17-month high on anticipation the onset of winter would be unusually cold and damp.
At the same time, crude oil prices rose to a four-month high on hopes OPEC would cut back production and lift prices going into the end of year. On the rally, crude approached $52 a barrel and natural gas prices traded above $3.70.
But when the U.S. weather pattern became less certain and OPEC unable to come together on production cutbacks, crude prices slipped to nearly $44 a barrel while natural gas prices dropped to a seven-month low.
Percentage wise, crude falling from $52 down to $44 represents a 15.4 percent decline and natural gas prices moving from $3.70 down to $2.725 is a 26 percent drop. Natural gas was especially bearish with prices going from a 17-month high to a seven-month low in three weeks.
Crude did the same. And the weakness can be blamed on uncertain weather conditions and uncertainty regarding the resolve of OPEC.
The uncertainty gripping a host of markets did not go unnoticed on Wall Street. In early August, the Dow Jones was approaching 18,550 and the S&P was over 2,180.
This week, both markets closed at their lowest levels in four months with values back to where they were in early July. The weakness is being blamed on the upcoming election.
Some blame the weakness on the Fed possibly hiking interest rates. Others blame the weakness on the uncertainty gripping every market on the board.
Here are a few thoughts from Investopedia regarding markets and uncertainty: “Every day it seems like the world is getting smaller. If you watch any financial television station or read the newspaper, you are most likely aware of how events in one country seem to have an ever-increasing effect on other countries around the world. We are more interconnected now than at any other time in history. It goes without mention that globalization definitely has its positives, but when threats of financial crisis, war, global recession, trade imbalances, etc. do occur, it often leads to talk of moving money to safer investments and increasing government deficits. This rising uncertainty can confuse even the well-informed investor.”
Investopedia asks the following question: What’s an investor to do?
They answer: “you can’t go wrong over the long term by keeping yourself well-informed and getting into a position so that you can take advantage of prices when things reverse.”
Investopedia goes on to state: “When situations of heightened uncertainty arise, the best defense is to be as well-informed as possible. Keep updated by reading the newspaper and researching individual companies. Analyze which sectors have more to gain and lose in a crisis and decide on a long-term plan. Times of heightened uncertainty can lead to great opportunities for investors who position themselves to take advantage of it.”
I could not agree more with Investopedia about the great opportunities that can be found when markets move in a herd instinct, up and down, north or south when uncertainty rears its ugly head.
Over the past few weeks, with the onset of uncertainty, there are a host of markets undervalued and poised to rally. A host of markets.