US: Problems beyond policy content – UBS

Generally, investors are concerned with policy content. Fiscal changes adjust the relative performance of different sectors of the economy, and markets react accordingly. But the current US administration has added two complications. Policy is less predictable, and it seems more likely to have unintended consequences, UBS' economist Paul Donovan reports.

Perception of policy professionalism might become an investor focus

"Erratic policy decisions across a range of areas have added a risk premium into the US economy. Policy decisions can be quickly reversed, and there are fewer signposts for what decisions will be. In the past, investors looked to views expressed by cabinet members and senior officials as a guide to policy evolution. With decision-making focused so much on one individual, those signpost are of limited help today."

"The fact that policy decisions have been made quickly, by people who do not always have prior government experience, has introduced unintended consequences—either forcing policy reversals or causing economic disruption. Even if those consequences do not affect areas investors focus on, they send a signal about how policy is formulated. The perception of policy professionalism might become an investor focus."

"Financial and economic models tend to operate on quantifiable inputs. Introducing unpredictability and unintended consequences removes any pretense of precision in forecasting the US economy. The weightings attached to risk scenarios are thus higher than normal."