The Uncertain Market

It’s often said that the stock market doesn’t like uncertainty. When uncertainty rises, stock prices tend to fall.  

When Lehman Brothers filed for bankruptcy protection on September 15, 2008, it started a landslide for the S&P 500. Investors didn’t know what toxic assets other banks were holding, so they sold. Banks became suspicious of what other banks might be holding, so they stopped lending.    

It may seem incredible that we’re still talking about Greece’s debt problems, but the reason we are is due to the amount of uncertainty that is dredged up by the Greek situation.   

Late in 2009, Greece announced that its budget deficit would be triple previous estimates. That set off a chain of uncertainty that’s put the very existence of the European Union and the euro in question.   

And when we hear that French President Sarkozy threatened to pull France out of the EU less than 2 weeks ago, it’s pretty clear why investors may still be a little uncertain.  

It may well be that the European Union’s days are numbered. And it’s hard to argue that it would be a bad thing. The economies in the EU are very different. If all Germany and France have to look forward to is more bailouts, well, that’s a problem.   

Gold prices were getting a beat down earlier today as oil prices and the euro bounced off of some support levels. If I had to choose between owning gold, oil or the euro, I’d choose oil. I’d add gold if that were an option. I can’t imagine why I would want to own euros. 

I’d like to hear which you prefer.

Getting back to the theme of uncertainty, I think it’s important that we don’t become “certain” about the outcome of the EU situation and the current correction in the stock market too soon.   

The $1 trillion bailout pledge from the EU hasn’t restored much confidence. I can’t help but think back to when Congress passed out own bailout plan. That helped stem the tide of the market’s sell off, but it didn’t prevent the ultimate lows that came months later. 

Right now, the stock market seems to be waiting for the next shoe to drop.   

Uncertain markets have the potential to sell-off sharply. And we’ve already seen one such drop, the now famous “flash-crash” from May 6. All we would need is some negative news about the U.S. economy and we could easily see another leg down.   

Of course, uncertain markets also yield the best opportunities to buy quality stocks at attractive prices. The key lies in knowing when to buy them.