The Impact of Uncertainty

My job, as an analyst, is try and construct a reasonable projection of the future. I do this by looking at historical events and by looking at prevailing market conditions. One thing I cannot effectively model is uncertainty. I can create space for uncertainty through “sensitivity testing,” but it is a fool’s errand to try and predict when and how uncertainty will happen. Uncertainty naturally worries people who need to lock in decisions now regardless of what the future holds, so any change from the expected leads to a new set of winners and losers. 

The result of the last presidential election introduced and enormous amount of uncertainty in the business community, and the results have been fascinating. The recent election will be studied heavily for decades to come because of the large difference between what polling was suggesting and what actually occurred. Nearly all polling organizations predicted Clinton would win the election, and thus many organizations planned accordingly. Clinton, who seemed to bill herself mostly as the continuation of the Obama administration, would have likely resulted in more of the same things we’ve experienced in the past 7 years. Most of this time could be described as steady, yet subdued growth, resulting from gridlock in Congress and the Fed having no more policy tools. Compare this to Trump, which nobody was really sure what to expect. 

Then, on election night, shock rang through markets when it was becoming increasingly clear that Trump could, and would, win the election. At one point, the Dow Jones Index experienced a drop in the futures markets by over 750 points, which is over 4% of the total market value. This drop wasn’t because of fear of what Trump would do as president, but rather because nobody had expected him to become president, and so nobody had time to process what this could mean. As it turns out, over a week after the election, the stock market experienced an enormous rally, with the Dow Jones now only a hair below its record high. Interest rates are also seeing a significant jump as well. The 5-year US Treasury rate was 1.34% when Clinton was expected to win the election, and as of 11/17 the rate closed at 1.73%, which represents a 30% increase! 

There is definitely a lot of uncertainty out there. The increases in the stock market may suggest that business conditions may be improving. But, the wide swing in interest rates could indicate growth, yet fears of inflation too. Another interesting aspect of this election is that the Republican party gained majorities in both houses of Congress as well. This was also unexpected from polling before the election, and it is too early to predict what changes this will bring in fiscal policy. 


Personally, I think this only reflects what will become a growing trend in uncertainty going forward. In 2013, the number of registered American voters who consider themselves as independent reached a record high of 42%. One can assume that Democrats and Republicans very roughly split the remainder, giving each party roughly 29%. This means when either party controls both Congress and the Presidency, then 29% of the population is calling the shots for the other 71%. And as control switches back and forth, there will be inevitable turmoil from swinging from one extreme to the other. The American electorate may not be as divided the media portrays, but those who control the levers of power are probably more widely divided than what we actually see. I would interpret this as a lot of uncertainty that does not lend itself to many predictions.