*** ALL THINGS MONEY >>>> ATM ***

[EZ2]

Why Donald Trump Doesn't Scare the Market
MARKETWATCH 12:25 PM ET 5/23/2017
President Donald Trump has stirred plenty of uncertainty, but except for one day last week, he hasn't shaken stocks. Two economists have a theory for why.

Last week's little bout of market jitters (https://www.wsj.com/articles/falling-u-s-dollar-pressures-stocks-in-japan- 1494990962) was quickly forgotten. With stocks moving higher on Monday, the CBOE(CBOE) Volatility Index, or VIX, slipped back below 12. Meantime, an index based on word combinations in news articles shows uncertainty surrounding U.S. policy is unusually high (http://www.policyuncertainty.com/us_monthly.html). And so the mystery of why the market's so-called fear gauge can signal so little worry, despite everything else, is back.

Usually periods of unusual policy uncertainty are periods when stock market volatility is unusually high. Economists Lubos Pastor and Pietro Veronesi even developed a model of why (https://www.nber.org/papers/w17464), theorizing that policy uncertainty reduces the value of the implicit protection that the government provides for the market. Investors, knowing they may be facing more risk than before, get a little wobbly.

What is going on now might seem out of step with that model, but Messrs. Pastor and Veronesi say that isn't the case (http://faculty.chicagobooth.edu/lubos.pastor/research/vox_vix_v5.pdf). Rather, they argue that volatility is a function not just of policy uncertainty, but how clear a signal is being sent by Washington. What may really have changed, they say, is that U.S. political signals have got less precise than they used to be amid all of the White House's reversals. (Mr. Trump said the North Atlantic Treaty Organization is obsolete (https://www.nytimes.com/2016/07/22/us/politics/ donald-trump-foreign-policy-interview.html?), for example, and then he said it isn't (https://www.wsj.com/articles/ trump-to-reiterate-commitment-to-nato-1492008887).) So much noise with so little signal may make investors nervous, but because it is so uninformative it doesn't push prices around.

That is a sharply different situation than in the early 2000s, when policy uncertainty was high during the regulatory backlash to the dot-com bust, and later during the financial crisis. In fact, the only other time the news-based U.S. policy uncertainty was high and the VIX was low was around 2013. But that was probably only because the newspapers the index uses were writing a lot about European woes that only had a glancing effect on U.S. stocks.

None of this is to say that policy uncertainty might not move the market in the months ahead, the economists say. Just because political signals coming directly from the White House (https://blogs.wsj.com/washwire/2017/05/19/timeline- trumps-tumultuous-two-weeks/) aren't getting the kind of attention they did in past administrations doesn't preclude the market from reacting to political signals that come from elsewhere. Last Wednesday's selloff provides a case in point: It wasn't one of Mr. Trump's pronouncements that sparked the selling, but reports that Mr. Trump in February allegedly asked then-Federal Bureau of Investigation Director James Comey to back off the investigation (https://www.wsj.com/ articles/trump-asked-comey-to-drop-flynn-investigation-according-to-memo-written-by-former-fbi-director-1494974774) of former national security adviser Michael Flynn.

Just because the market has been quiet doesn't mean it can't spring a leak.

Write to Justin Lahart at [e-mail] (mailto:[e-mail])

-Justin Lahart; 415-439-6400; [e-mail]


(END) Dow Jones Newswires
05-23-171225ET
Copyright (c) 2017 Dow Jones & Company, Inc.