You may have weathered the Financial Crisis and the COVID-19 pandemic sell-off, some may even remember the Dot.Com boom and bust, but this time around feels different. That's because it is.

 

In my entire career, I have never seen the stock market move 8.3 percent in 34 minutes on a rumor. That is what happened a few days back. To put that in perspective, the S&P 500 Index gains in minutes an entire year's performance. The following day it gave back half of that. Sure, we can blame these moves on computer-driven trading, algorithms, options, and the like but it doesn't change what happened and could easily happen again. 

 

If you feel the markets over the last few months are more akin to a roulette wheel in Las Vegas, you wouldn't be far wrong. In an atmosphere of radical uncertainty, daily turns in stocks and bonds become random events like a Lotto game.

 

Most market-moving events can be assigned a numerical probability to a set of outcomes which could then be calculated and priced. The Dot.Com era comes to mind. Valuations on some stocks were so high that their prices could not be justified.

 

Uncertainty enters the picture when we cannot assign a number to the probability of an outcome. It can still be modeled however by using history, similar events, stress tests, etc. We call them educated guesses. The pandemic falls into this category, although not at first. The race for vaccines, enforced isolation, and masking-up to slow the spread were all elements of educated guesswork. 

 

Today we live in a world where we aren't even sure what the outcomes are, or any idea of what probability to assign to each one. "Radical uncertainty concerns events whose determinants are insufficiently understood for probabilities to be known or forecasting possible." That was the conclusion of John Kay and Mervyn King in 2020 in their book "Radical Uncertainty: Decision-making Beyond the Numbers."

 

They argued that in certain instances there exists a deeper kind of uncertainty for which historical data provides no useful guidance to future outcomes. Fast-forward to today. Most people recognize that a massive change in our economic and political system is underway.

 

The tariff wars are but one element of this upheaval. In a world where tariffs can be raised by more than 100 percent, they are without precedent in the modern world. In addition, the unpredictability created when tariffs are announced, and then changed, in some cases several times, are examples of what we see as a world gone amuck.

 

Markets behave differently under these circumstances.  Volatility, which usually occurs infrequently, becomes a permanent and daily feature of financial markets. As a result, investors and traders insist on a higher premium for the risks they can't even identify. That, in turn, drives valuations lower, while cash increases as fewer investors are willing to chance buying into this volatility.

 

Now that you know how markets have changed, next week I will examine, how you should navigate through these trying times based on your age and risk tolerance.   

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.