By at least one measure, uncertainty building up in the global economy is at its highest since around 2016, even as stock-market indexes remain relatively close to their all-time highs following a series of violent trading sessions over the past week.
The Baker, Bloom & Davis Economic Policy Uncertainty Index — tracking hundreds of articles referencing the economy or uncertainty, among other terms, to gauge monthly monetary-policy uncertainty — showed policy uncertainty hitting a three-year high (see attached chart).
“With recession signals already flashing, this kind of uncertainty could be dangerous as it inhibits consumption and capital spending,” wrote Morgan Stanley Wealth Management’s chief investment officer, Lisa Shalett, in a Tuesday note.
Shalett said trade tensions between the U.S. and China, an inversion in the closely watched yield-curve between the 10-year Treasury
and both the 3-month bill
and 2-year note
where the longer-term yield falls below its shorter-term counterparts, has heightened anxieties on Wall Street about the health of the economy.
On top of that, geopolitical worries from Britain’s problem-filled exit from the European Union, a brewing political and currency crisis in Argentina, protests in Hong Kong and skirmishes in Iran are also weighing on investor psyches.
That concatenation of worries has helped to drive investors into the perceived safety of bonds and has delivered a fillip to gold prices
which topped $1,555 an ounce on Tuesday, while the Dow Jones Industrial Average
the S&P 500 index
and the Nasdaq Composite Index
lumbered lower on Tuesday but were still within a reasonable distance from their all-time highs, despite the whipsaw action of late.
What’s an investor to do?
Shalett says sit tight for next few weeks because global debt and U.S. stocks are too pricey. “Bonds are too expensive for long-term investors to hedge short-term stock weakness and international stocks are too cheap to abandon as they have priced the bad news.”