The Plunge in Policy Uncertainty

The consistent decline in Economic Policy Uncertainty*, as measured by the indexes presented here, would seem to serve as evidence supporting a continuation of the positive trend in European equities.  After all, one might reasonably assume that better defined policies and, therefore, less ambiguity, should be good for growth in general and the stock market, in particular.








However, when we look at a simple correlation of the overall Economic Policy Uncertainty index for Europe and the performance of MSCI Europe stocks, we find only a slightly negative correlation-- meaning that declines in uncertainty provide only minimal support for equities.  As we can see in the following chart, significant gains seem more assured when the index remains in a tight range below 100 on a consistent basis:



Perhaps we would be more optimistic about the potential for large gains in European equities if it appeared that there was more room for multiple expansion?  The fact that two-thirds (or more) of stocks in MSCI Europe continue to trade above their three-year average valuation levels (no matter which one you choose) remains a concern.



*Economic Policy Uncertainty