Every investor knows, or should, that the moment of maximum uncertainty is a time to buy. The only trick, then, is discerning when we’ve reached peak uncertainty.
The stifling lack of clarity about the breadth or severity of the Trump administration’s promised “reciprocal” tariffs due on April 2 is the obvious eye of this uncertainty storm.
But swirling around it are immigration restrictions, headlong and haphazard reductions in Federal spending and a separate but related confidence shock weighing on consumer behavior.
Friday’s midday rally in the S&P 500 from an early 1% decline to a minimal gain by the close came after President Trump said there would be some “flexibility” in the application of those April 2 trade measures. A vague and entirely reversible utterance, but the upward twitch in the index sends the message that after a month of volatile trading and universal fixation on policy risk, the potential for a relief trade is ample.
Renaissance Macro Research has consistently pointed out that when the U.S. Economic Policy Uncertainty Index is near an extreme high (in the top 10% of all readings since 1985), forward equity performance is better than average.
Over the ensuing three months, the S&P 500 has been up 80% of the time with an average gain of 8.8%. And perceived certainty is bearish: The lowest 10% of policy-uncertainty readings were followed by a positive stock market performance only 36% of the time. Currently, it hardly needs to be said, this index is at a record, eclipsing even the peak of the Covid panic.
This Sunday is the fifth anniversary of that crescendo of fear in the market, marking the low of a violent V-bottom that launched stocks to a 100% gain over the next 22 months.
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