Donald Trump’s second term has been marked by increasing uncertainty, with companies and investors in a holding pattern due to the “will he, won’t he” prevarication over import duties and other threats. This uncertainty has been reflected in various gauges of economic policy uncertainty (EPU), including the global EPU index, which reached a post-pandemic high in January.
Investors have taken notice, with gold prices hitting an all-time high this week and US treasury term premia edging up to levels last seen during Trump’s first term. However, despite this, US equity markets appear relatively calm. One possible explanation for this is that investors may still be skeptical of the impact of Trump’s threats, or may simply be too unsure to make any calls with conviction.
A 2017 study by the University of Chicago found that the US market does not respond to political uncertainty because Trump’s administration has been unreliable and difficult for investors to interpret. Another factor is that the Fed’s wait-and-see mode on monetary policy may be offsetting volatility concerns.
However, some warning signs remain, including a trading above its long-term average of VVIX, which measures investor expectations of swings in the Vix.
In essence, Trumpian uncertainty can be described as “shaken, not yet stirred.” Businesses and stock investors know that things are potentially turbulent but don’t know what to do next.
Source: https://www.ft.com/content/502f45d1-d34a-45d0-bbae-b3b2a746010c