In Times of Economic-Policy Uncertainty, It May Be Best to Avoid the Stock Market

Research suggests that stocks outperform bonds when uncertainty falls. But bonds are the place to be when it flares, as it has recently.

- DEREK HORSTMEYER

WITH THE start of any new presidential administration, there comes uncertainty surrounding economic policy. That is as true as ever, even with Republicans controlling both the White House and Congress.

But how does this uncertainty affect investors portfolios?

We decided to test this question by looking back at 40 years of returns in stock and fixed-income mutual funds and comparing against the Economic Policy Uncertainty Index, a measure used by the Federal Reserve that counts the number of newspaper articles containing the terms "economy," "policy" and "uncertainty."

Broadly, stocks perform better when economic policy uncertainty falls and bonds do better when it rises. But within those tendencies, we find some segments of the market perform worse than others-particularly when uncertainty emerges, as it did around the presidential election.

Our methodology