Even the most cursory glance at the headlines will make it clear that we are living in a time of heightened political, economic, and cultural upheaval, with tectonic shifts that make it just that much more difficult than usual to see where it is all heading.
In the markets, uncertainty refers to a situation in which the economic environment contains a high degree of risk, with variable unknowns involved, including a high degree of political instability, unprecedented changes in government policies, shifting global alliances, and an increased frequency of natural disasters.
Many economic decisions are made because of expected outcomes. For example, firms make investments based on expected demand for what they sell. To make these decisions, these firms must form a view about what the future might look like.
Cloud of Unknowing
Of course, there is never an absolute certainty about the future. But increased uncertainty of the sort we are now experiencing can cloud any ability to form a reasonably confident view about what’s next while making forward-looking decisions.
Increased uncertainty can affect fiscal policy, monetary policy, and business investment. It impacts the economy on both the company and individual level, as well as globally; uncertainty can impact oil prices, food prices, the flight of capital into and out of a nation, and much more.
For an investor, the rapid changes and constant barrage of information can be overwhelming and anxiety-inducing, making it even more crucial to focus on long-term financial objectives. Uncertainty can cause havoc in even the most well-informed investor’s portfolio.
Unpredictability about the economy, however, may not always move in step with uncertainty reflected in financial markets. Uncertainty can exacerbate risks of financial market turmoil, delay consumption and investment decisions by people and businesses, and prompt lenders to tighten the credit supply. Disconnects between high economic uncertainty and low financial market volatility can persist over time, but if a shock brings market volatility roaring back, it can have much broader implications for the economy.
The potential harm from economic uncertainty is important for policymakers to recognize because of potential spillover effects through trade and financial linkages. These spillover effects have the potential to trigger international financial contagion. Firms may wait to make investments, delay research projects, or defer hiring decisions until the economy’s likely future path becomes clearer. It might also slow down the reallocation of resources to more productive uses.
Uncertainty and Trade
According to the International Monetary Fund, uncertainty also matters for trade. When future policies are uncertain, companies may be less inclined to invest in new production or export markets. This, in turn, reduces trade flows.
Global events can spur volatility because their effects are more widespread, and the uncertainty is more significant. The Economic Policy Uncertainty Index for the U.S. has risen since the 2024 election to its highest levels since March 2022, when Russia invaded Ukraine.
Uncertainty affecting trade can be complex and multi-layered. For instance, chronic changes in government functions, volatile politics, outbreaks of disease, disruptions in the supply chain, or military conflict could all, separately or in combination, generate uncertainty about the future direction of trade policy and discourage companies from investing in trade.
At the firm level, when uncertainty increases, investment decisions become riskier. When companies are uncertain about the future, they are reluctant to invest in new production facilities or equipment or to expand into new markets.
Uncertainty also increases companies’ aversion to risk. When companies are risk-averse, they are less likely to trade with foreign countries to avoid losses caused by frequent changes in terms of trade induced by political upheavals. When firms are uncertain about the rules, they may be less inclined to invest in research and development or to compete with foreign companies, which may have more market information and be more willing to take risks.
Interest Rates and Tariffs
One of the key themes that could continue to impact financial markets is the Federal Reserve’s decisions on interest rates. Changing interest rates is one of the factors that could trigger stock market volatility as market participants try to predict what the Fed will do and when.
The gap in yields on 10-year and two-year U.S. Treasuries has narrowed, reflecting expectations that the inflationary effects of higher tariffs could limit the scope for the Federal Reserve to further cut interest rates in the coming months.
The Connecticut-based financial data and software company FactSet searched for the terms tariff and tariffs in transcripts of the conference calls of all the S&P 500 companies discussing earnings from December 15, 2024, through February 6, 2025. Of these 291 S&P 500 companies, 50% (146) cited the terms tariff or tariffs during their earnings calls for the fourth quarter. This marked the highest number of S&P 500 companies citing these terms on quarterly earnings calls since the second quarter of 2019 (when these terms were cited by 155 firms). Many of these companies looked at uncertainty in association with comments on tariffs proposed by the White House. Several companies stated they were unable to quantify the impact of tariffs at the time of their earnings call.
Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said leaders at companies he has spoken to are inclined to pass higher costs incurred from tariffs completely—”100 percent” —through to consumers. Whether that would be a sustainable strategy depends on whether consumers “rebel” against increased costs, he said. Bostic made clear that uncertainty about the economic outlook had risen dramatically.
“With respect to possible tariffs,” said General Motors chairman and CEO Mary Barra, “we are working across our supply chain logistics network and assembly plants so that we are prepared to mitigate near-term impacts.” She added: “Many of these actions are at no cost or low cost.” But the automaker chief stressed that “what we won’t do is spend a large amount of capital without clarity.”
Uncertainty Effects and Expectations
Policy uncertainty is having a negative impact on U.S. consumer sentiment, as evidenced by a significant decline in consumer confidence in the most recent survey released by the Conference Board, a New York-based business membership and research organization. The survey showed that consumer sentiment slumped in early February 2025 to a seven-month low on worries that tariffs will cause a resurgence in inflation.
Also, recent data on U.S. gross domestic product (GDP) showed that fixed investment spending was down in the fourth quarter, which could be due to business uncertainty about tariffs and other policies.
As Jeff O’Connor, head of market structure in the Americas at Liquidnet, a large portfolio manager, put it, “Few things are certain in the current market, but we can be confident that unknown unknowns will continue to throw up surprises.”
In a February 3, 2025, note to clients, economists at JPMorgan wrote, “The risk is that the policy mix is tilting (perhaps unintentionally) into a business-unfriendly stance.”
Bruce Kasman, JPMorgan’s chief economist and head of global economic research, said a downgrade to U.S. growth expectations feels more likely than it did at the end of 2024. Duties aren’t the only concern, Kasman said. Mass deportations of immigrants could shave half a percentage point off U.S. growth in 2025, according to an analysis undertaken by Kasman’s team. Cutting off as much as $1 trillion in payments to federal contractors may also have a material impact on the economy, he said.
When it comes to cutting red tape, the first Trump administration’s time in the White House didn’t result in a net reduction in regulatory costs for businesses. According to the American Action Forum, a Washington D.C.-based conservative think tank, estimated business regulatory costs actually increased by $40 billion during the first Trump administration.
Conclusion: Navigating Uncertainty
There is always some level of risk and uncertainty when investing. The reality is that financial markets around the world are constantly changing. Where there’s uncertainty, there is usually stock market volatility. If the stock market has gone up over the medium or long term, it’s bound to drop over the short term. By trying to predict or control the market, you’ll be setting yourself up for disappointment.
Although some volatility is an inevitable result of investing over market cycles, investors should maintain a diversified portfolio of stocks and bonds in accordance with their time horizon. Knowing your personal risk tolerance is also important.
Diversification is a key investment strategy that prevents significant losses if one area of your portfolio takes a serious hit. Be well-informed and adjust your investment strategy as events change, allowing you to invest wisely during uncertain times.
Greater transparency and well-designed policy-communication frameworks can better guide market expectations—making policy decisions, and their transmission to the real economy, more predictable.
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