February 25, 2022

Navigating Uncertainty

 Even irrefutable evidence is rarely enough to pierce the armor of self-justification

- Author Carol Tavris

I’ve always been fascinated by the behavior of homo sapiens. These days one chooses to navigate the challenges of leadership of a country they claim allegiance with while another launches an unprovoked war on another country it claims historical ownership of. Is one right and one wrong? Not in their own minds, as human behavior has always been a simple matter of self-justification as a means to an end. I bring this up because in the world of the capital markets the comfort investors need to invest or divest should be connected to associated economies and external events are dissonance.

The broad indexes began the week continuing a decline that has moved in tandem with the potential of an unprovoked attack by Russia on Ukraine. But was it the potential for war that fed the volatility or it’s uncertainty that fed the volatility? Uncertainty is always at the heart of my strategic allocation of capital to investment. The process begins with economics and culture and follows with technical analysis of the broad markets. I then cross reference the results with Global Economic, Commodity, Currency, Interest Rates, Central Bank and General Policy considerations. The result is it’s easy for an analyst, technical or fundamental, to recognize when a market is overbought. What the group can’t do is predict the event that will trigger the reversal, and that is the uncertainly the capital markets face every day. All in the effort to find what I want to invest in and where the investment should take place.

The capital markets don’t dislike uncertainty, it’s an inevitable condition, but they like certainty much more. For example, I often refer to economic data issued by the Bureau of Labor Statistics that by and large is not perfect, but better than the pundit narratives. At this moment in time, the US economy is growing at 7%, with concurrent, and worrisome, inflation. We were certain of that condition, what we weren’t certain of is how The Fed would address the condition. The broad indexes retreated in wait and then the Fed explicitly stated that the Fed Board was going to raise interest rates at their March meeting. Then the volatility went down, until the argument of how much they would raise rates.

The broad indexes have staged a recovery this week after the potential for an invasion of Ukraine was made certain. How that isn’t a current problem for the indexes as they finish the week higher, in my opinion, too much has deteriorated in the technical condition of the indexes to ignore. As more uncertainty is diluted, rates are raised, war becomes another Afghanistan and inflation shows even the slightest sign of improvement, the indexes will continue their volatile recovery. But only when the current technical conditions (i.e., Moving Averages) show certain signs of reversal will the institutional investors come in, and at that time the bull market can continue.

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