April 13, 2003

War, Uncertainty and the Markets
by Marcel Chartier

Its now ( at time of writing) about a week since the American forces have entered Iraq, and the markets are up. Why amid conflict do the markets move forward? Markets are project six months in advance. The hope is that the conflict will have ended within that time and the world economy will start to move forward.

And, I think that isn't too far off. Markets hate uncertainty, they would rather know about a negative than anticipate it. Once a negative is known then market watchers look forward to the time when that negative dissapates, and at this point I think market followers are seeing the end of a bear market and the end of the war, though it may be weeks away.

The war has got me thinking about the market and market psychology, that what appears to be obvious sometimes is not. From a non-market follower's perspective, the war is bad and the markets should go down. But from a market oriented perspective, the war is good, as it removes the uncertainty of going to war. This is why trying to predict the market is impossible on a day to day basis. All that is needed to reduce the market enthusiasm now is some war event to reduce certainty : then the market will go down, again.

Market volitiity and the perception of certainty appear to go hand in hand. When investors perceive that a company, process, industry seems more and more of a sure thing, the value gets bid upwards, as uncertainty builds, confidence collapses and value collapses. This process gets played out everytime a country, company or sports team appears to be a percieved winnner. People get on the bandwagon. As an investor, paying attention to market mood is helpful when looking for value or evaluating value.

I also think that uncertainty begets a greater impression of uncertainty for other issues, for example, we are now hearing about SARS, and the perception of SARS negative effects appears to me to be quite sensational in relation to its true level of risk. This effect is the opposite of the "errational exhuberance" that Mr. Greenspan referred to in the hayday of the tech bubble, where every one was so certain regarding the upward movement of the market.

Thinking of the markets in the context of certainty and uncertainty, for me, helps clarify market reactions to the perception of events.