In an uncertain world, don't just sit there, do something - Unfortunately, it is a flight to safety

The Fed talk has been forecasting a 25 bps cut with some market extremes discussing a 50 bps change for a short period last week. Forget forward guidance based on the data, central banks are reacting to uncertainty. 

We don't know what will happen to the trade war. We don't know what will be fiscal policy, what laws will be enforced, who should be in charge, who to trust, or even who to listen to. There is real news and fake news and many cannot tell the difference. Every political speech has to be followed by spin to tell us what we just heard. Last Friday, we had to have a clarification from the NY Fed that what the president of the NY Fed clearly told us was not what he actually said, or the market's interpretation of his words were not what message he wanted to send.

The economic policy uncertainty index has been rising and this does have a spillover to financial markets. If you don't know what to expect, capital investments are hard to discount. Forget about the discount factor if you don't know what cash flows will look like. Valuations will suffer when there is more uncertainty. Risky stocks will be discounted. Leveraged stocks will be discounted. Trade contracts will be on hold. Hiring will be done on a temporary basis.

Risky stocks will be discounted and safe assets (low volatility) will bid higher. The contrarian who believes that uncertainty will be resolved will be rewarded for holding risky assets, but this change in uncertainty is hard to predict. Certainly, political (policy) uncertainty in key markets is unlikely to fall. The US political cycle is just getting started. Still, a change in the uncertainty headwind will create the opportunity for growth and higher stocks.