The old saying is that markets hate uncertainty.
That’s not true.
Or it’s not true right now, anyway.
As far as we can see, the market loves uncertainty. The more uncertainty it can get, the better.
How so? And why so?
Here, we’ll explain…
Why do folks think the markets hate uncertainty?
Simple. They think it’s because investors want to know what will happen next.
They believe investors want to know that things look good, so they can buy stocks. Or that things look bad, so they can sell stocks. As long as they know, one way or the other, investors are happy. Right?
But what if that was wrong? It’s a bold claim. But based on our take of the market overnight, we can only come to one conclusion — investors love nothing more right now than a big dose of uncertainty.
Rates to rise, but not just yet
On Wednesday, the US Federal Reserve’s Federal Open Market Committee (FOMC) met.
The FOMC sets US interest rates. It meets several times each year to decide whether to raise rates, cut rates, or leave them where they are.
If you follow the markets closely, you’ll already know the FOMC’s decision. It was to leave interest rates where they are.
What impact did this have on the market? The Dow Jones Industrial Average gained 0.9%. The benchmark S&P 500 index gained 1.1%.
What can you draw from that? To the layman, it suggests that the FOMC gave the market some certainty. Makes sense, right? The market loves certainty.
However, a glance at the FOMC’s statement, issued with the decision on interest rates, paints anything but a certain picture. Check this out:
‘Near-term risks to the economic outlook appear roughly balanced. The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.’
We don’t get it. The Fed says things are looking good. There is a stronger case to increase interest rates…but not just yet.
So when? Wouldn’t you like to know? Wouldn’t we like to know? Wouldn’t the whole world like to know?
On that, the Fed isn’t telling. The uncertainty continues.
And the market loves it.
The market’s new best friend
So, why does the market love uncertainty right now?
The answer is simple. In an uncertain investment world, there are no losers.
That’s just how the Fed likes it, and it’s just how investors like it.
If the market can trade in a relatively tight range, bulls can say they will be right, and bears can say they will be right. Bulls won’t get margin calls from a crashing market, and bears won’t get margin calls from a soaring market.
Contrary to conventional wisdom, uncertainty is helping to keep the market high.
It’s an about-face to what most people usually expect from the markets. That’s why the Fed is using ‘doublespeak’ to tell the world that the market and economy is recovering, and that it would be fine to raise interest rates…but that they won’t raise interest rates.
Got it? We don’t blame you if this has you all confused. But that’s the plan. The more confused you are, the less likely you are to do anything that could cause the market to either crash or soar.
Who’d have thought it? Uncertainty is the market’s new best friend.
For The Daily Reckoning
PS: Oddly enough, market uncertainty is having an outsized effect on one specific group of stocks. Most investors wouldn’t even think of looking at these stocks in uncertain times. Yet, these stocks have (so far) been among the best performers on the market this year. For details go here.
Editor’s Note: This article was originally published in Money Morning.