Trade policy has never been as uncertain as it currently is, and that uncertainty is leading to volatile stock markets, a new study finds.
The study, by the University of Chicago’s Steven Davis, was circulated by the National Bureau of Economic Research and dovetails with a recent Federal Reserve publication.
Davis examined rising policy uncertainty in the U.S. and global economies, drawing heavily on newspaper-based measures.
Trade policy has become both more uncertain and more protectionist under the Trump presidency, Davis writes, and it has “a capricious, back-and-forth character that amplifies uncertainty and undermines a rules-based trading order.”
Trade policy gets attention in 26% of newspaper stories about equity-market volatility
in leading U.S. newspapers from March to December 2018, compared to just 2.7% from 1985 to 2015. “In other words, trade policy went from a virtual nonfactor in U.S. equity-market volatility in recent decades to one of its leading sources in 2018,” he writes.
‘[T]rade policy went from a virtual nonfactor in U.S. equity-market volatility in recent decades to one of its leading sources in 2018.’
That uncertainty undermines the economy “by leading firms to delay or [forgo] investments and hiring, by slowing productivity-enhancing factor reallocation, and by depressing consumption expenditures.”
The Fed in late August published a paper quantifying the economic effects of trade policy uncertainty.
Uncertainty about trade policy in 2018 only may have lowered aggregate U.S. investment by more than 1%, the Fed said.
U.S. stocks over the last 52 weeks, despite the gyrations, have climbed — the Dow Jones Industrial Average
is up 3% and the S&P 500
is up 4% over that time frame.