Author: David I. Templeton, CFA, Principal and Portfolio Manger
Much of the recent equity market volatility seems to be driven largely by uncertainty around a number of policy positions being pursued by the Trump administration in Washington, D.C., i.e. tariffs, cutting government expenses, a Gold Visa card, establishing a U.S. Sovereign Wealth Fund. The elevated uncertainty is showing up in policy uncertainty surveys and in surveys of businesses. The first chart below measures three sources of uncertainly as can be found in the methodology at the Economic Policy Uncertainty website. The three sources incorporated in the index are:
the volume of news articles discussing economic policy uncertainty.
the number of federal tax code provisions set to expire over the next ten years giving a measure of the level of uncertainty regarding the path that the federal tax code will take in the future.
the uncertainty index reviews the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters and the dispersion between individual forecasters' predictions about future levels of the Consumer Price Index, Federal Expenditures, and State and Local Expenditures to construct indices of uncertainty about policy-related macroeconomic variables.
Clearly the index has experienced a large spike in uncertainty this year.
As it pertains to small businesses, the recent NFIB Small Business survey continues to show a high level of overall optimism at a level of 100.7; however, the Uncertainty component rose to 104 in the February survey, the second highest reading recorded as seen below.
The elevated level of uncertainty has spilled over into investor sentiment measures. The next chart below shows the American Association of Individual Investors' Sentiment Survey detailing that the bull/bear spread is near a record negative number or high level of bearishness at -36.5%.
Below is the Investor Intelligence Sentiment Bull/Bear spread, and the spread is below zero at -3.4%. The II Sentiment survey reviews more than 100 newsletters to gauge the level of bullish or bearishness of newsletter writers. With a spread below zero, more newsletter writers are bearish versus bullish.
From a positive perspective, the next three charts show inflation is continues to trend lower, S&P 500 earnings continue to see growth and the recession probability chart shows an economic contraction appears to be a low probability likelihood, at least at this point in time.
Lastly, the S&P 500 Index entered a short correction on March 13, that is, down -10% from the market's high reached on February 19. The market has recovered since the -10% contraction but remains -7.7% below its high and down just -3.6% on the year. With sentiment and uncertainty at stretched levels, it appears investors' actual actions are not as bearish as their stated sentiment. It seems important for investors to understand policies being promulgated by the Trump administration and understand how they may impact the market and the economy. With this noted, I do not intend the below to indicate taking a side in favor of or opposed to the policies, but the All-In Podcast interview with Howard Lutnick, President Trump's secretary of commerce, is worthwhile in that it does provide insight into the roadmap being pursued by the administration. The podcast is 1:45 hours long but is insightful whether one does or does not support the current administration positions.
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