by Denise Chisholm, Director of Quantitative Market Strategy, Fidelity Investments
With recent tariff headlines creating market volatility, it is worth revisiting why uncertainty is often a good thing for stocks. Businesses today face a landscape that looks completely in flux – monetary policy, fiscal policy, taxes, trade, and regulations are all shifting. It makes sense to worry that companies might pull back on hiring and spending, slowing the economy and potentially profits in the process. But historically, that’s not how things usually play out. Two professors from Stanford and the University of Chicago attempted to quantify uncertainty using newspaper coverage – essentially measuring “headline risk”. Their data includes the subcategories we’re after – fiscal policy, taxes, government spending, trade, and regulation.
And surprisingly, the years following periods of high uncertainty have seen stronger recoveries in capital expenditures (core durable goods shown in the chart), improved hiring and better earnings growth (neither shown). The opposite of what you might think. Why? Perhaps the economic impact turns out to be less severe than feared, perhaps recoveries are strong enough to withstand uncertainty, or perhaps corporations are better prepared than anticipated. To me, the results are more interesting than the ‘why’.
While uncertainty might seem like a signal to de-risk, that approach looks problematic historically. More often than not, uncertainty has tended to be a tailwind for market returns. For investors, the choice is ironically clear – statistically speaking, it’s been better to embrace the unknown.
This rings true for what is owned within equity markets as well. Defensive sectors, like Utilities, have tended to lag the market by almost 10%. The reason? Earnings growth tends to be durable despite uncertainty. And that looks to be the case in the current data. While investors might want clarity on all topics, that’s often the only one needed.
This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.
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