The Prices of everything have gone through the roof everywhere in the world. On the top of that we have the Russia-Ukraine conflict which promises to further impact the supply of oil AND wheat. That’s a lot of uncertainty! The war, the inflation, the rising interest rates, labour shortage, talent attrition…. That is a lot of uncertainty. Or is it?

Markets were shooting up in January this year with surprisingly good corporate results, lots of liquidity and even more of optimism. Was the uncertainty really low in Jan 2022? Did the future have more certainty in January?

Was the uncertainty really any less in January? Or was it only a perception that the future was more certain? As we all know, right next month, began a war that the world hasn’t seen since the last world war!

Even a second-grade student can now tell us that the future was atleast as uncertain in January 2022 as it is today. Yet the Sensex breached a high of 61,000 in January! For reasons best left to Nobel Prize winners like Nassim Taleb to explain to us, the financial markets didn’t see it that way though.

There is a very simple, and yet so subtle that it is very easy to miss, lesson to be gleaned from this. Uncertainty is always the same, but the market perception of its quantum constantly changes.

And wait! Here’s the fun part. Market overpays when it believes there is low uncertainty (aka optimism) and bleeds when it thinks there is too much (recession). Do you realize what impacts this market perception? EVENTS right? And which events? Not events which have just happened but events that, which the market fears or hopes, will happen!

Read that once more. Markets price themselves not based on an event that has happened, but in anticipation of what they foresee will happen, ofcourse, GIVEN that the said event has happened. That’s why it confounds investors when sometimes the stock price of a company, which just declared great results, falls.

If market movements are based on the perception of a future which always remains uncertain, how do you think the people claiming to predict the market, do it?

Probably Crystal Gazing!?!?

- Devang Shah

May 1, 2022

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