WHY THE STOCK MARKET HATES UNCERTAINTY

Posted by stocker on March 24, 2010 in Stock market basics | Short Link

One of the principles any beginner should learn early on in their investing career is how uncertainty can affect a stock price and the markets overall. It seems in many cases, investors hate uncertainty more than anything else, including bad news.

As an example, you can look at the prices of health care stocks before and after the vote in the Senate to mandate health insurance. There is lots of speculation from both sides on what this bill will do to our country and to the health care industry. Some people say it is the beginning of the end and others think it is the best thing ever and of course there are a million opinions in between.

With the passage of the bill one might have thought that health care stocks would go down as the government is going to be more involved and private companies might be on the short end of that. But on Monday March 24th the day after the vote, health care stocks went up and the market as a whole went up as well.

One of the biggest reasons for that is that finally something had been decided and some of the uncertainty was removed. People hate not knowing what the future holds when it comes to their money. The whole stock market is based on people’s opinions of what is going to happen in the future. Uncertainty about that future leads people to sell and/or sit on the sideline because they just don’t want to commit any of their money until they feel like they know what is ahead.

People are constantly searching for the hottest stocks to buy right now and those would be the ones that have the brightest future prospects. What is happening to a company right now is less important than what might happen to it in the future. For instance, Apple has a lot of great products out there that help and have helped the stock climb to it’s very high price. But right now, people are specifically interested in the Ipad which hasn’t even come out yet. Investors are continuing to bet that the Ipad will be a hit as they drive up the price.

Uncertainty was also very evident on 9/11 and the beginning of a big sell off. When people feel uncertain about the future, they tend to sell. They just don’t want to have their money out there and vulnerable when they are unsure of what is happening or going to happen. 9/11 was one of the most hazy and unsure times our country has ever seen. In those instances, the phrase “cash is king” comes to mind because most people are content to sit on their cash and wait things out.

Stocks usually go down when a company announces bad news but sometimes even that isn’t the case. If a cloud has been hanging over a company and driving the price of the stock down, sometimes news from the company achnowledging the problem will stablize the stock and maybe even send it up. Likewise, bad news and numbers from a specific quarter can be offset by good news about the future. In cases like that, a companies stock may actually go up the day they announce poor sales but give a rosy picture of the future.

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