Navigating Uncertainty in Financial Markets

Uncertainty – generally a harmless word and rarely considered offensive. Lately however, it’s uttered with increasing frequency and contempt, while often wrapped in a subtext of confusion and fear. More troubling, is the word’s appearance in the outlooks of central bankers, politicians, and corporate executives. This is for good reason. Uncertainty is rising dramatically as the new U.S. administration has upended many core beliefs, muddied the economic outlook, and left many scratching their heads. The introduction of tariffs (and proposed tariffs) has threatened to disrupt global supply chains and reintroduce inflation. Stock and bond markets dislike sudden increases in uncertainty, as demonstrated by significant price volatility in recent weeks. 

You may be wondering if this uncertainty will derail your investment strategy

This is a natural response as uncertainty inherently creates discomfort for humans. Psychologists Daniel Kahneman and Amos Tversky introduced the Loss-Aversion Theory in 1979, in which they found that people tend to feel the pain of loss twice as strongly as the pleasure of an equivalent gain. That sounds about right given the roller coaster the stock and bond markets have been on this year. Rest assured, at Nexus, we are well positioned to manage uncertainty on your behalf. 

Uncertainty is always present, but it varies in intensity 

Whether it’s selecting the correct route to avoid traffic, picking the winning college basketball team for March Madness, or investing for your future, we can make educated guesses but cannot predict outcomes with certainty. The range of outcomes (or the distribution of outcomes for the statisticians in the room) varies as the information we take in becomes more or less perfect. As Michael Mauboussin put it in his book More Than You Know: Finding Financial Wisdom in Unconventional Places, “Risk has an unknown outcome, but we know what the underlying outcome distribution looks like. Uncertainty also implies an unknown outcome, but we don’t know what the underlying distribution looks like.” Greater uncertainty doesn’t necessarily imply greater risk. Rather it leaves us feeling less confident about the future, even if the most likely outcome is the same. 

Who had “A return to 1930s style trade protectionism” on their bingo card for 2025? Significant changes in uncertainty have historically been associated with major stock market corrections, such as during the recent COVID-19 pandemic, the Global Financial Crisis of 2007 to 2009, and the speculative bubble of the Tech Wreck from 2000 to 2002. Today, the rise in uncertainty is driven by the Trump administration’s sudden and severe pivot to protectionism, its willingness to fracture global trade relationships, and the announcement of the largest U.S. tariffs since the 1930s. Exacerbating the uncertainty is the lack of clarity in the administration’s intentions, a disregard for economic principles, and an apparent willingness to sustain a recession and rekindle inflation. Not surprisingly, we can’t predict whether the negative financial market reaction will persist, or wane as others have in the past. However, as we wrote in August 2020, the stress caused by the uncertainty is discomforting.

In The Psychology of Money, author Morgan Housel writes that “The volatility/uncertainty fee — the price of returns — is the cost of admission.” In other words, we must endure uncertainty and volatility to access stock market returns to grow your wealth. This is not inherently good or bad; rather, we must be prepared to accept occasional spikes in economic and stock market uncertainty. How we manage that uncertainty is critical to success. 

Nexus has a toolbox to manage uncertainty

One tool we use is inversion. Rather than focus on what is uncertain, we focus on the opposite – what we believe to be certain. Legendary investor Charlie Munger preached “invert, always invert” to refocus the mind on what matters. We adopt this mental model of shifting perspective, by reminding ourselves of what we believe to be certainties. For example, over the long term we believe that Canada will produce goods that the world wants, businesses will strive to be successful, and individuals will work hard. Furthermore, we believe stock markets will reflect the value of the underlying businesses, and bond markets will reflect the risk of individual issuers. 

In addition to inversion, we use patience and discipline to our advantage, avoiding the urge to act impulsively when individual stock prices move rapidly. We combine these with other risk management strategies such as diversification and valuation discipline (in other words, we don’t overpay) to add protection and resilience to the portfolio. We also use our collective experience through multiple market cycles to identify opportunities when other investors act irrationally.

Your wealth plan with Nexus serves as your North Star, your confidence that shines brightly when uncertainty reigns

The Nexus investment philosophy is built to protect and grow your capital regardless of the level of uncertainty. We start with your financial situation, your needs, and your wants, and we develop a detailed plan including savings, spending, and allocation between stocks and bonds. Our equity strategy, which focuses on a diversified portfolio of high-quality companies, acquired at reasonable prices, has compounded capital over the long-term and performed relatively well in periods of market stress. Similarly, our bond strategy focuses on high-quality issuers, which has added important stability. 

Uncertainty will rise and fall over time, and while this fluctuation may elicit a strong reaction, its presence cannot be avoided. At Nexus, we deal with uncertainty every day, and we manage it by staying true to your wealth plan and our investment philosophy. You can be certain of that.