Investors are adept at finding ways to navigate just about any government policy, good or bad. Tariffs, once set, can be modeled for how they will affect corporate profits, prices and, in turn, the broader economy. The mass firings of federal workers can be analyzed for how they might increase unemployment.
The thing that investors really struggle to put a price on is uncertainty. And right now, there is a profound sense of uncertainty in the stock market.
It has been brought on by the whipsawing policies and pronouncements of the Trump administration. To name just three: the on-again, off-again threats of tariffs; President Trump’s refusal to rule out the possibility of a recession, followed by reassurances that a severe downturn is unlikely; and the chaotic cuts to the federal government.
For many of Mr. Trump’s supporters in Washington and across America, the president is doing exactly what he should be doing as a savvy negotiator: keeping trading partners like China and Mexico off balance in order to gain the upper hand.
But for investors, such dizzying shifts have made the stock market in the early months of the Trump administration “untradable,” said George Goncalves, head of U.S. macro strategy at MUFG Securities. Perhaps the administration will raise tariffs further and stocks will fall again. Perhaps the administration will abandon tariffs altogether, likely soothing the market.
“The volatility does not make this easy,” Mr. Goncalves said. “It’s a challenging environment to have any conviction to hold a view.”
Since peaking last month, the S&P 500 has tumbled roughly 9 percent, often with large swings through the course of a day. The index is close to the psychologically significant threshold of a correction, defined as a drop of 10 percent or more from its high. Other indexes that are more closely tied to the ebb and flow of the economy have fallen further. Investors have poured into options markets to try to hedge against further big stock moves.
Uncertainty is hard to price. Over time it still has a cost.
Just as investors are stepping back from the market, positioning themselves defensively to try to wait out the storm, consumers and business leaders are also becoming more cautious, according to recent surveys. When uncertainty reigns, consumers and businesses tend to pull big spending plans, and businesses reduce hiring.
“If you are waiting and seeing, then you are not buying a new car or going on vacation, and if you are a business, then you are not hiring or spending money,” said Torsten Slok, chief economist at Apollo Global Management.
This is the cost of uncertainty.
As investors, businesses and consumers freeze up, the economy cools. This has yet to show up consistently in official data, which lags behind events affecting the economy in the present. Airlines have already warned of lower travel bookings, retailers have warned of stretched consumer finances, and food producers have cautioned that tariffs could lead to fresh price increases.
The latest monthly survey of small businesses by the National Federation of Independent Businesses showed that uncertainty was near the highest level that the longtime survey had ever recorded.
“Uncertainty is high and rising on Main Street,” the group’s chief economist, Bill Dunkelberg, said in a statement.
In a different survey of large U.S. companies by the Business Roundtable, chief executives said they had reduced plans for hiring and capital expenditures and lowered sales expectations partly because of an “atmosphere of uncertainty in Washington.”
As businesses rein in hiring plans, unemployment could pick up. If fewer people have a job, consumer spending is likely to fall. If consumer spending falls, businesses make less profit. And when corporate earnings expectations drop, so does the stock market.
This was not what most investors expected going into this year.
After a tumultuous 2024 election, stock markets initially welcomed the new administration and hoped that the long rally of the previous two years would continue. Early on, Mr. Trump’s tough talk on tariffs was seen more as a negotiating position, not a policy position he would put into effect. And there was a sense that his reputation for citing the stock market as a barometer of his success would put a floor on any sell-off.
Some investors still hope that is the case and that Mr. Trump will eventually back down on tariffs.
Others are less sure. In options markets, investors are placing large trades that would protect them from a big jump in volatility, which typically occurs if stocks fall sharply.
Investors have also put up bets that pay off only if the S&P 500 falls sharply over the coming months. These trades could be an attempt to protect against that drop, or profit from it. Either way, they signal that investors are braced for a rough market ahead.
“This uncertainty is going to linger,” Mr. Goncalves said. “The question is: What if it goes too far?”
