If there’s one word that has dominated the discussion about markets and the economy, it’s uncertainty.
Speaking at Yahoo Finance’s All Markets Summit on Wednesday, Abby Joseph Cohen, senior investment strategist at Goldman Sachs, Liz Ann Sonders, chief investment strategist at Charles Schwab, and Michael Batnick, director of research at Ritholtz Wealth Management, each addressed the concern.
And, to some extent, downplayed its importance for investors.
“You have to keep on reminding yourself that political uncertainty does not equal stock market uncertainty,” Batnick said. “If there’s anything the last year has told us, it’s that humans are very, very bad at forecasting.”
Between Brexit, the election of Donald Trump, and even the outcome of last Sunday’s Super Bowl, Batnick noted that, “these multi-standard deviation events are happening with greater and greater frequency.”
After the UK voted to leave the EU in June 2016, stocks initially sold off and then rallied. Within weeks, the FTSE 100 was at a new high. The same pattern played out on Election Day in the US as stock futures tanked when it became clear that Donald Trump would be the next president of the United States. By the end of 2016, we were talking about Dow 20,000.
“But even if we know what is going to happen, it’s very hard to profit off of it,” Batnick said.
“Policy uncertainty has gone parabolically up,” Sonders said. The VIX, which measures expected volatility and is known in markets as the “fear index,” however, remains near record lows.
To Sonders, this represents the “crash in correlation” we’ve seen in markets that have gotten used to assets moving in the same direction at the same time.
“You really moved from ‘risk on, risk off’ to ‘Trump on, Trump off,'” Sonders said. Sectors that appear set to benefit from any policies out of the Trump administration — financial and energy stocks, for instance — have rallied. Sectors more exposed to potentially negative developments, such as trade, have had a harder time since the election.
“Let’s be clear, the US economy has been doing well as we head into 2017,” Cohen said.
“But what about the changes that are up ahead with regard to policy? Many of the changes investors are dealing with are not just changes in the US … but the role of the US with our trading partners, our allies, and so on. And I think many investors did not expect there to be this much confusion right now.”
Cohen added that the nature of our government’s branches creates some policy changes that investors anticipate to be enacted quickly. Others, like changes to Obamacare or changes to the tax code, will require the action of Congress.
“And even there, there’s something of a mismatch,” Cohen said.
“Our Founding Fathers put a messy system in place,” Sonders said.
And it seems that sorting this mess out will be the main work of investors in 2017.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland