Uncertainty on the Rise
As we enter 2025, the financial markets are sending mixed signals. On one hand, stocks are near record highs, driven by hopes of lower interest rates and a soft landing. On the other, the Economic Policy Uncertainty (EPU) index is surging, signaling potential trouble ahead. This stark contrast is a warning to prepare for volatility.
The EPU index, a key measure of market uncertainty, has jumped to levels not seen since the start of the pandemic. The main driver? Concerns over the policies of the second Trump administration. Markets usually climb despite uncertainty. Yet this time, the risk feels more like approaching a steep drop than a steady ascent.
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The EPUCTRAD Index tracks trade policy uncertainty through news coverage and policy changes. Historically, spikes in this index have preceded sharp rises in the VIX, the stock market’s “fear gauge.” The VIX, or CBOE Volatility Index, measures expected stock market volatility based on S&P 500 options. This happened in 2019 during the U.S.-China trade war and again in 2020 during the COVID-19 economic shutdown.
Today, we see a similar pattern emerging. The administration is working to boost the economy. In the process, trade policies are becoming less predictable. And global tensions are increasing. These factors all add to rising uncertainty. This isn’t just a headline risk—it’s a real shift in market conditions.
Businesses and investors face a volatile landscape. Fluid decision-making, like announcing and then postponing tariffs, has them always adjusting. The lack of clarity makes long-term decision-making increasingly difficult. While some equity markets remain stable, bond traders are demanding higher returns due to the risk. Supply chains were already strained by COVID-19 and geopolitical tensions. They now face additional disruptions as companies struggle to plan for tariffs that may or may not materialize.
Uncertainty and the VIX “Fear Gauge”
History shows that when the EPU rises, the VIX usually follows, leading to market turbulence. Right now, the jump in EPU is even greater than at the start of the COVID-19 crisis. Suggesting that markets have not fully priced in the risks of another Trump term.
Bear markets are driven by both psychology and economics. Selling in a declining market is difficult, and VIX spikes often mark the final stage of a correction. So far, we haven’t seen a major VIX surge, meaning the worst is yet to come. Data from 1990 to 2022 shows that VIX spikes don’t just predict market corrections—they tend to mark their climax. If we don’t see the VIX hitting 50, more turbulence could be ahead.2
The disconnect may be due to a few factors. First, investors might view Trump’s threats as part of a negotiating strategy, making them feel less impactful. Second, traders could be too uncertain to make strong predictions. A study from the University of Chicago found that the market didn’t respond to political uncertainty. This was because Trump’s messages were often inconsistent and difficult to understand.3
Additionally, the VIX itself may reflect several factors. Such as the market’s view of Trump’s growth-friendly policies or the Fed’s wait-and-see stance, which reduces volatility.
For investors, this disconnect between a high EPU and a relatively calm VIX is like a coiled spring. Tension is building, and when it releases, the market reaction could be sharp and severe. High volatility often leads to falling stock prices. Investors seek higher returns for more risk, which pressures valuations.
The warning signs are clear: Market volatility is likely to rise—possibly sharply. This isn’t just a small bump ahead; it could be a major shift in the market landscape. The gap between the soaring EPU and the subdued VIX cannot last. As reality sets in, the VIX is likely to surge, bringing potential market declines.
Uncertainty & Gold
In response, investors have flocked to gold as a safe-haven asset, driving its price to record highs. For instance, spot gold recently soared beyond $2,900 as Trump threatened fresh tariffs.4 This trend underscores gold’s role as a hedge against economic and geopolitical instability. Analysts predict that if current uncertainties persist, gold prices could further rise to $3,000.5
Diversification across different assets is more important than ever. Safe-haven assets like gold could provide protection. In this uncertain world, a Gold IRA can offer a sense of stability. Holding physical precious metals in a tax-advantaged account helps your portfolio grow securely. To learn more, contact American Hartford Gold today at 800-462-0071.
