TKer: When uncertainty becomes unambiguously high

A version of this post first appeared on TKer.co

The word "uncertainty" gets thrown around a lot in discussions about the stock market.

And it’s not surprising. There is literally always something to be uncertain about. In fact, uncertainty defines the risk stock market investors take as they bet on a future that isn’t guaranteed. Uncertainty gives risk-tolerant investors the opportunity to buy stocks at a discount. Uncertainty is why the returns in the stock market tend to be relatively high.

But far too often, pundits will appear on TV or get quoted in a news article casually saying that "uncertainty is elevated" — when in fact uncertainty may be at normal levels. Because there is always uncertainty, and any implication that there can be periods with no uncertainty is ridiculous.

Of course, there are times when uncertainty explodes above typical levels. And they come with some very glaring signs.

Five years ago this week, the World Health Organization declared that COVID-19 as a pandemic.

In the weeks prior, there had already been concerns about the seriousness of the outbreak. But it wasn’t until mid-March that we began to see huge parts of the economy get shut down in the effort to contain the spread of the virus. And it would be months before we got a sense of what this unprecedented disruption would mean for the economy.

Businesses around the world were not prepared.

Most companies operate assuming a range of probable future outcomes. And for many publicly traded companies, the midpoint of that range is presented to investors in the form of quarterly and annual financial guidance. As the quarter and year proceeds, companies will sometimes raise guidance. Sometimes they’ll lower guidance.

Things have to get really bad for companies to withdraw or suspend guidance.

That’s exactly what a flood of companies did in early 2020 as they had little to no visibility into what business would look like in the near term.

According to BofA, 71 S&P 500 companies withdrew guidance from March 2 to April 7 that year.

Zooming out a bit, 173 Russell 3000 companies withdrew guidance during the first quarter, according to S&P Global.

"The question for managers is: Do they know about future performance substantially more than investors do?" NYU Professor Baruch Lev told me at the time. "My guess is that in most cases managers aren’t now better informed than investors. We are all in the dark. In that case, guidance is futile."

It’s one thing for a company to revise guidance lower. It’s another much scarier thing for a company to admit they just don’t know where things are headed.