The Uncertainty Principle

The uncertainty principle is a fundamental concept in quantum mechanics. It states that there is a limit to the precision with which certain pairs of physical properties, such as position and momentum, can be simultaneously known. In other words, the more accurately one property is measured, the less accurately the other property can be known.

That seems to be a very descriptive summary of Trump’s first month in office. Take defense spending as an example. We need to restock after massive amounts of aid to Ukraine and Israel and bolster our own defense, yet defense spending is going to be cut. The more we know about one side of that equation, the less we seem to know about the other.

Historically, efficiency in government spending is rarely attempted and even more rarely effective. Fast and deep cuts create concern and it’s harder to see the benefits – it’s the uncertainty principle at work. If Trump’s efforts bear fruit, there is much to be gained from a structural reduction of the Federal deficit, but it’s not easy to see that now.

The old market adage is that stocks hate uncertainty. As Trump attempts to eliminate waste by turning the government upside down and shaking vigorously, the level and breadth of uncertainty is quickly expanding. There appears to be very few places for investors to hide from that uncertainty, which is beginning to make markets difficult to navigate.

Uncertainty – Stock Market Style

After several years of earnings beats and rising earnings expectations, investors are viewing earnings more critically and have been generally unimpressed by strong results and unforgiving of small earnings misses.

Despite the weak market this week, we are still close to all time highs on the S&P500 and NASDAQ, but it sure doesn’t feel that way. The market leaders of the last two years, the mega cap technology companies, are floundering a bit, but the rest of the market has picked up a little momentum. The question appears to be where the leadership is going to come from as Trump continues his crusade. It is safe to assume mistakes will be made, but no one knows precisely where the mistake will be made. We look for the stock market to remain choppy for the time being.

Uncertainty – Bond Market Style

It’s not just stocks feeling confused. It seems like just yesterday, the world expected a sizable decline in U.S. interest rates. True to the adage that when everyone is convinced one thing will happen, something else will, the Fed’s concerns are being re-focused on inflation. Translation: Don’t look for more rate cuts anytime soon. Where the Fed is ultimately headed remains a matter of great debate. The consensus had been that the neutral rate (the neutral policy rate is the theoretical level that neither stimulates nor restricts the economy) is around 2.5%, but that consensus is quickly moving higher toward 4%. With Fed Funds now 4.25% to 4.5%, the implication is that current Fed policy is only modestly restrictive. Assuming the Fed agrees that the neutral rate is 4%, even relatively small upticks in inflation could easily push the Fed to hike rates.

That might feel good for those holding cash for safe returns, but the implication would also be that inflation would be eating away at those safe returns and a rate increase would be a headwind for stocks.

Markets are Anticipatory, not Reactive.

At least markets attempt to be anticipatory, but at this point, the current math is VERY complex. Things are changing fast. The uncertainty isn’t isolated, it is endemic. For us, that implies market swings, in either direction, can be quick and sharp. The important point for investors is not to be overly reactive to these swings. That can easily lead to mistakes. The best advice is to stick to the investment plan designed to achieve your long-term objective.

What We’re Reading

• DeepSeek GPU smuggling probe shows Nvidia’s Singapore GPU sales are 28% of its revenue, but only 1% are delivered to the country

• Senate adopts $340 billion budget blueprint for Trump’s agenda after marathon ‘vote-a-rama’

• Home sales drop sharply as prices hit an all-time high for January

• Another pandemic? China scientists discover new bat coronavirus that poses risk of animal-to-human transmission

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The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

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By: Adam