181 | The Primary Question of Each Recession

The stock market is a lot like humans - it’s not big on uncertainty.

When the future feels less certain, the stock market and its underlying businesses tend to decrease in value.

When the future feels more certain, they tend to increase in value.

Of course it's this way because “the stock market” is only the sum of humans’ perceived uncertainty about the well-being of the world’s businesses.

Most of the time, one person’s uncertainty is offset by another person’s certainty, so we get negligible changes in the value of the entire market.

But one or twice a decade, there are single questions that make almost everyone feel uncertain…

2022 - Were we too optimistic about our rebound from COVID?

2020 – How many people are going to die from COVID?

2008 – How many people made a bet on or were debtors to a bad mortgage?

2002 – How many companies do not have a viable business model?

Nearly 100% of the market decline in each of these seasons could be tied to our collective inability to answer these questions.

And the subsequent market rebounds happened as the answers to these questions became less squishy.

Not by coincidence, none of these questions had a thing to do with the next president, a change to tax code, or a Federal Reserve interest rate adjustment.

The next recession will likely be the next time we have an unanswerable question, it’s just hard to know the question before it’s asked.