R8| Monday, December 7, 2020 THE WALL STREET JOURNAL.
In U.S. dollar terms, the MSCI U.K. in-
dex lagged behind the S&P over this
period by 29 percentage points (with
dividends reinvested).
The U.K.’s experience helps us to
appreciate why it is so worrisome
thattheU.S.stockmarketisatare-
cord despite heightened economic
uncertainty. It means that investors
face the not-inconsiderable risk that
this Wall Street-Main Street discon-
nect will be overcome by the stock
market falling significantly.
The federal government’s extraor-
dinary fiscal and monetary stimulus
this year has played a major role in
preventing that from happening, at
least so far. A significant chunk of
that stimulus money undoubtedly
found its way into the financial mar-
kets, propping up prices.
Notice, however, that this govern-
ment stimulus doesn’t actually resolve
the Wall Street-Main Street discon-
nect. It instead merely postpones the
eventual day of reckoning.‘Roaring ’20s scenario’
One way the disconnect could end
without stocks plunging, of course, isfor economic uncertainty to fall signifi-
cantly. This presumably would happen
if and when successful vaccines are
widely available, the pandemic ends
and the economy quickly recovers. Vin-
cent Deluard, head of global macro
strategy at investment firm StoneX,
calls this possibility a “Roaring ’20s
scenario,” drawing an analogy to the
economic boom that emerged out of
the destruction of World War I and
the Spanish flu pandemic.
Businesses themselves don’t appear
to be envisioning their futures through
these rose-colored glasses, however.
Consider the Survey of Business Un-
certainty, another tool devised by Prof.
Bloom and others, including the Federal
Reserve Bank of Atlanta. This survey
focuses on what business leaders antic-
ipate over the subsequent four quar-
ters. The latest reading, for November
2020, which reflects survey responses
after thePfizer/BioNTech SE andMod-
ernavaccine results had been an-
nounced, indicates that uncertainty
about sales over the coming 12 months
is 70% higher than the average since
data began being collected in 2016.
This illustrates the extent to which
the long-term economic consequences
of the pandemic are far from clear, ac-
cording to Prof. Bloom.
Even if the Roaring ’20s scenario
comes to pass and economic uncer-
tainty falls significantly, it isn’t clear
that the stock market would perform
all that well. Since equities haven’t
fallen as much as they normally would
during this year’s heightened uncer-
tainty, they might not gain as much as
they otherwise would have as uncer-
tainty declines.
The stock market might even fall in
a Roaring ’20s scenario, according to
Mr. Deluard. He says an economic
boom would precipitate a major stock-
market rotationaway from growth
stocks to value stocks. He reminds us
that such a rotation happened in the
2000-02 bear market, and though the
average value stock actually rose dur-
ing that time, the overall market aver-
ages—dominated as they are by the
large-cap growth stocks—fell.Mr. Hulbertis a columnist whose
Hulbert Ratings tracks investment
newsletters that pay a flat fee to be
audited.Hecanbereachedat
[email protected].
BRYAN SMITH/ZUMA PRESSCovid testing in Jackson Heights,
in New York’s Queens boroughJOURNAL REPORT|INVESTING IN FUNDS & ETFS
mains nearly three times as high as
its average over recent decades.
In an interview, Prof. Bloom says
there are several ways in which
heightened economic uncertainty hin-
ders economic growth. It raises the
cost of capital, which means that
businesses are unable to justify as
many new projects as they would
have otherwise undertaken. It causes
both businesses and consumers to
delay expenditures. And it reduces
the effectiveness of government
stimulus programs.The U.K. experience
Prof. Bloom points to what happened
to the U.K. economy following the
Brexit referendum in 2016. The U.K.
version of the EPU skyrocketed and
British business investment fell 11%
over three years. Investment fell even
further during the Covid-19 pandemic,
of course.
Over the same three years, busi-
ness investment in the U.S. rose 20%.E
conomic uncertaintyin the U.S. remains at
near-record levels, and the stock market is at an
all-time high. If history is any guide, something’s
gottogive.
That is the message flashing from an index of
economic uncertainty created by three finance pro-
fessors: Scott Baker of Northwestern University,
Nicholas Bloom of Stanford University and Steven Davis of
the University of Chicago. Before this year, there was a strong
correlation between increases in this index and falling stocks.
In fact, based on this historical pattern back to 1900, the S&P
500 appears to be about 20% higher than it should be.
Such a signal might be surprising considering the close-
to-final-resolution of the election and hopeful news on
Covid-19 vaccines. But here is how the professors’ index
works: It is based on the frequency of mentions in major
newspapers of words and phrases associated with economic
uncertainty. In the accompanying chart, this index—known
as the Economic Policy Uncertainty, or EPU, index—has re-
treated somewhat from its spike in April and May, but it re-BYMARKHULBERTStocks Laugh at Economic
Uncertainty, for Now
An index suggests that the economy
and the stock market are out of syncTheEconomicPolicyUncertainty
indexfortheU.S.Source: Scott Baker, Nicholas Bloom andSteven Davis at
http://www.PolicyUncertainty.com0501001502002503003504001986 ’90 ’95 2000 ’05 ’10 ’15 ’206-month moving average
of daily valuesAverage since 1985Carefullyconsidertheinvestmentobjectives,risks,charges,andexpensesbeforeinvesting.
Aprospectus,obtainedbycalling800-669-3900,containsthisandotherimportantinformation.Readcarefullybeforeinvesting.Whenyouunderstandthedetails,
it’seasiertoseethebigpicture.
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