The pall of uncertainty
Back
Article Type
Insights
Topic
Macro
Published
March 26, 2025
Read time
5 mins
Author
Frank Rybinski, CFA
PDF
Download
Share

We’ve noted that, from an economic standpoint, 2025 is likely to be the year of policy transition. That means lots of noise and turbulence as the economy adjusts to a new, sharply different, fiscal equilibrium.

 

Years ago, Stanford’s Nick Bloom and Scott Baker, along with the University of Chicago’s Steven Davis, constructed a way to chart “uncertainty.” Today, that measure of uncertainty is one of the highest in recent years, outside of when COVID-19 struck.

 

Exhibit 1: Economic Policy Uncertainty Index

Sources: PolicyUncertainty web site, Haver Analytics. Data as of March 2025.

 

Looking at the various components of that index tells an interesting story. Fiscal policy and taxes are a main function of the federal government and uncertainty in those areas is quite common.

 

However, trade has historically been largely on autopilot—only the hardcore trade nerds would have known the details of the latest tinkering of trade agreements or what grievances were being adjudicated at the World Trade Organization. Fast forward to today and I’m getting grilled by my HVAC service person about global trade policy.

 

It’s worth noting that the headline index (shown in Exhibit 1) is much more robust and includes forecast dispersion and policy expirations than the sub-indices (shown in Exhibit 2), which relies solely on newspaper article counts.

 

Exhibit 2: Economic Policy Uncertainty Index: Sub-indices

Sources: PolicyUncertainty web site, Haver Analytics. Data as of March 2025.

 

Why is this important? As new President Trump’s economic policy begins to manifest itself, it will begin to remove the fog of uncertainty and allow rational economic actors to decide what action is in their best interest. Do they increase capital expenditures? It’s likely if bonus depreciation is passed, less so if it’s not. Do more companies follow the lead of Honda and Taiwan Semiconductor Manufacturing Company and invest more in their US production capacity? Possibly, if the right incentive structure is put in place. In short, private enterprise is largely rational and will purposefully respond (good or bad) to a whatever incentive structures are put in place.

 

This overarching theme has largely been the reasoning behind our belief that economic cooling will continue in 2025. Structural policy shifts take time to put in place and the larger the proposal the more uncertainty they create. Until the chess pieces have found their new home on the board, it is tough for major new private initiatives to occur. 

 

But therein lies the rub (i.e., risk)—that uncertainty lingers and drags on growth. This is the scenario the risk markets have grabbed onto recently, which has led to the contraction in multiples on a forward basis. The S&P 500 multiple is down about 2 points to 20.8x (which is still a touch rich from a valuation perspective). Credit has acted a little better, especially higher quality. Investment grade (as measured by the Bloomberg Barclays US Corporate Index) is roughly 10 basis points wider. That tells us that this isn’t panic mode. Rather it’s some of the froth is being taken out as participants grapple with uncertainty.

Important disclosures

Author

Frank Rybinski, CFA
Head of Macro Strategy
Frank Rybinski, CFA, is head of macro strategy responsible for guiding the firm’s global macroeconomic view as it pertains to tactical and strategic asset allocation. This includes analysis of the economy, monetary & fiscal policy, interest rates and the relative value between asset classes.  
View profile
Related Articles
View all Aegon insights