Value Investing – Economic Uncertainty (Lesson 23)
On February 21, 2020 the Dow Jones Industrial Average was 29,000, on March 23rd, 2020 it reached the 18,600 mark and hovers in the 24,000 range during the month of April, 2020. The underlying driver for this decrease is COVID-19 and the required shelter in place mandate by most state governors. The economic impact is yet to be determined. This is the uncertainty aspect of economics. The term ‘economic uncertainty’ has a historical definition which has been modified due to the pandemic response. This article will cover the historical meaning and then its updated definition. The term is redefined due to the Paycheck Protection Program loan applications. One of the requirements is for the owner of the company to certify that their business meets the definition of economic uncertainty. The historical definition and the current legal definition are different. Thus, it is important for the reader to differentiate between the two meanings.
Economic Uncertainty – Historical Definition
If you think of the economy as a train pulling a load on the track, you would base its near future position on its current and historical trend. It is unlikely its current speed will change; thus, we can predict its future position with some degree of confidence. The short-term position is easier to determine with greater conviction and accuracy than 3 to 6 time periods out. Why does our confidence decrease the further out in time the train travels? Inherently,
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