Markets hate uncertainty...
Often, a major unknown is enough to explain a losing period for stocks. No one wants to buy if the future is unclear. They'll just sell instead.
It's not just markets, either. Real businesses have a hard time planning for the future when it feels like a minefield. How can you invest in a project for the next decade when the next few months are up in the air?
That's the situation we're seeing right now... because small-business uncertainty just hit the highest level in recorded history.
It's surprising. But the explanation is simpler than you might think. And it means this rise in fear isn't worth fretting over...
If you want to know how folks feel, hard data and real money are better measures than words. You should always watch what people do, not what they say.
Still, if you ask the same folks the same questions over time, the history of their answers will be darn valuable.
That's what the National Federation of Independent Business ("NFIB") has been doing for decades. This is an association for small businesses that routinely asks its members what they expect in the economy.
It builds several indexes based on their responses. We've talked about the NFIB Small Business Optimism Index in the past. But today, we're looking at the Uncertainty Index.
This index represents the "I'm not sure" answers from NFIB's surveys. And according to this reading, small-business uncertainty just hit its highest level on record. Take a look...
When I first saw it, this level of uncertainty caught me off guard. I would have expected it to be worse during the pandemic or the global financial crisis.
This makes perfect sense, though... once you investigate the data.
The last time we saw a spike and multiyear high similar to today was late 2020. Before that, it was late 2016. And we saw another multiyear high in late 2012.
Notice the pattern?
Small-business uncertainty spikes once every four years or so... in the months just before the U.S. presidential election.
In fact, the only time in the past two decades that it hasn't seen a multiyear high before an election was in 2008. But with the economic crisis unfolding back then, folks were probably too certain of demise to be stumped with uncertainty.
Once you pick up on this pattern, this potentially scary headline is a lot less concerning. Of course uncertainty spikes around elections. Election Day is the most uncertain thing that gets a regular spot on our calendars.
But as investors, we know elections aren't something to fear. Once they're over, the uncertainty is gone. And oftentimes, even a bad outcome is better for the markets than not knowing what's next.
That will likely hold true this time around, too. Regardless of who wins the White House, stocks will likely do well once the election passes... And we're certain to see a collapse in small-business uncertainty.
Good investing,
Brett Eversole
Further Reading
"Once you study history, you begin to realize that the constant barrage of fear rarely turns into anything meaningful," Brett writes. You don't have to look far to find reasons to sell – the headlines are full of "boogeymen" lurking in the shadows. But selling stocks out of fear is rarely a good idea... Read more here.
"The electoral horse race simply doesn't drive stock market performance," Sean Michael Cummings writes. The market is fraught with uncertainty during election season... But history shows that whoever wins the White House actually won't drive stocks – or stop a bull run like we're seeing today... Learn more here.
