Inside Markets — Uncertain Policy Dynamic

Uncertainty around the timing and magnitude of policy changes is being priced near worst-case outcomes. The focus on policy uncertainty started after controversial cabinet picks, particularly Gaetz and Kennedy. The pricing of pharmaceutical stocks is a great example with the group ex-LLY trading at a record 50% valuation discount to the S&P 500. It’s worth repeating that the economics team from Trump’s first term was anything but controversial. Applying that template to open positions at the Treasury, NEC and CEA today would likely reduce some of the uncertainty discount that rushed into markets early last week.

Friday’s flash PMI data could be an important catalyst for markets. US Manufacturing PMI has been in contraction (below 50) since July with some respondents citing election uncertainty as a reason to delay hiring and capex plans. While it’s still early, it’s possible that the November manufacturing survey will include fewer references to election uncertainty and result in a number that implies economic expansion. The timing/magnitude of policy changes may drive an uncertainty discount for equity markets, but the direction of travel around tax and regulation may be clear enough for some management teams to move forward with capex/hiring plans. A manufacturing PMI >50 with subdued price components would be the type of catalyst to reenergize the cyclical/value trade.