Regime Uncertainty and the S&P 500 as a “Fear Indicator”

Highly-regarded J.P. Morgan Global FX Strategist Ken Landon included the following in his email advisory on Tuesday:

Here’s a tautology: it will no doubt be another volatile day. With confidence having been severely undermined over the past two weeks, risk markets will continue to be susceptible to bouts of extreme fear in both directions. This is not an environment to take large risks, which is a big problem for the overall economy. Business decision-makers—the ones who decide about investment and hiring—are effectively frozen in their tracks. They view financial market volatility with concern, but likely are more fearful about Washington. It would not be a stretch to say that the S&P 500 effectively has turned into a fear indicator of Washington policymakers. The right policies would have the power to dramatically lift this index, but a continuation of the status quo would be bearish.

For those who want to read an historical account of the effects of policy repression and uncertainty, I have attached a classic paper called “Regime Uncertainty” (yes, the same one I sent out in March 2009. [Read the article]).

Reprinted with permission and thanks.