By Chris Matthews, MarketWatch
U.S. stocks are threatening to post their worst week since early March, largely on the back of renewed threats that the Trump administration will raise tariffs on $200 billion of goods imported from China annually to 25% from 10% as early as Friday.
But according to Jeff deGraaf, founder of Renaissance Macro Research, rising policy uncertainty usually marks a buying opportunity—though current levels aren’t yet high enough to be considered bullish. “With volatility spiking around trade, there is little to do other than assessing where opportunities versus dangers lie,” he wrote in a Wednesday note to clients.
Stocks were attempting to stabilize Wednesday after a rough start to the week. The S&P /zigman2/quotes/210599714/realtime SPX -3.65% is still down around 2% in the week so far, while the Dow Jones Industrial /zigman2/quotes/210598065/realtime DJIA -3.40% is off around 1.9%. The S&P 500 notched record highs last week, while the Dow had neared its all-time high from last fall.
Policy uncertainty would trigger a bullish signal if it reaches high enough levels, as measured by the Economic Policy Uncertainty index , composed by economists Scott Baker, Nick Bloom, and Steven Davis.
But despite recent developments in U.S.-China trade negotiations, deGraaf wrote, policy uncertainty hasn’t actually reached bullish levels yet.
“Policy uncertainty is bullish…so we don’t mind uncertainty, but it hasn’t spiked to bullish yet,” deGraaf said.
According to his analysis, when policy uncertainty rises above the 90th percentile, or a reading of 167.8, the S&P 500 tends to rise in value, and when it is in the 10th percentile, or 71.1 and below, that is a bearish indicator for stocks. In April, the economic policy index printed a reading of 109.3, after spending three of the previous four months at levels in the 90th percentile.
The Baker, Bloom and Davis index, however, is updated at the end of each month, so given this week’s drama respecting trade negotiations, policy uncertainty could be rising, without it yet being picked up by the gauge.