Don’t Let Policy Headlines Derail Your Investments

The first month of the new administration has been a whirlwind, with hundreds of executive orders aimed at everything from shrinking the size of the government to reshaping global trade. It has been virtually impossible to keep tabs on every proposed policy change, let alone determine all their downstream economic impacts.

Our research team has devoted significant time to reading these executive orders. Last week, we concluded that 98% of what we were reading had no implications for investors. While some of these orders could lead to future policy changes that are impactful, many (such as tax cuts and federal spending) require Congress to draft and pass legislation, which takes time.

However, the deluge of headlines could lead one to believe that the world is being turned upside down. The Federal Reserve Bank of St. Louis publishes an “Economic Policy Uncertainty Index” that scrapes keywords from thousands of news articles daily. The index is currently at its third highest reading since 1986, with only the Lehman Bankruptcy (2008) and COVID (2020) periods having higher levels of uncertainty.

To us, this feels nothing like September 2008 or March 2020. The stock market is near all-time highs, companies are reporting strong earnings, and job growth is re-accelerating. However, investors are an emotional group, and politics often triggers emotions. Perhaps that’s where the opportunity lies.

We analyzed how the S&P 500 performed in the year after each spike in the US Economic Uncertainty Index since 1986. Most of the time, the index falls between 0-200, and when it does, S&P returns are close to average. However, when the index spikes above 200, returns over the next year are well above average. The index’s current reading is 494.

We are not saying the S&P 500 will rise 30% over the next year, as the table suggests. The S&P gained 25% or more in each of the last two years. But we do believe there is value in turning off the news or at least separating headlines from your investment decisions. There will be policy changes that matter, and we’ll stay on top of them and adjust accordingly. But the current news cycle feels out of step with the current economic reality.

Maybe there’s more upside amidst the uncertainty than the headlines suggest.

As always – reach out to your Advisor to review your portfolio and ensure it aligns with your long-term goals (not the headlines of the day).