A constant theme for investors in 2025 has been the disconnect between what’s been happening in the real world of politics and policy, and how financial markets have responded. The chaos of constant policy shifts has to date been weathered by financial markets, with stock indices not far off all-time highs. This can only be based on a benign view that outcomes may be better than feared and markets are willing to look through the carnage.
Or are markets just complacent?
Firstly, let’s be clear – uncertainty around economic policy is simply off the charts!
We have never seen this level of confusion as regards economic management – ever. The index of policy uncertainty (EPU) soared in 2025 and remains elevated. Trade policies via social media suggest little likelihood of a calming soon.
Last week the Bank of England warned that risks remained high and of a threat to financial stability from global tensions
Stocks have recovered from the falls of early April and market health indicators such as breadth, while maybe narrower than we would like, are within recent ranges. There has also been a sense of markets becoming less sensitive to every tariff tantrum or tweet.
Uncertainty and volatility are two different things. Are there other warning signals out there?
The “go to” measure of market uncertainty is the often quoted VIX index. The VIX measures expected volatility in the S&P 500 based on options pricing. That means the VIX isn’t just showing what happened in the past… it’s forecasting what traders think might happen in the stock market over the next 30 days. In early April this index spiked to over 50 but has been sub 20 most of the time since – a strong sense of “nothing to see here”.
And it’s not just stocks. The MOVE index which does the same thing for bonds has almost exactly the same profile, spiking in April and falling away significantly since. In the past how bond markets perform has had knock-on effects for stocks. For those who remember the TMT crash, we saw stress first emerging in corporate bond yields, before impacting on equities. We have seen sporadic short term fall-offs in bond markets such as the US and UK, only to recover reasonably swiftly. US 10 year bond yields are close to where they started the year around the 4.5% level. It’s a similar story of stability in corporate bonds.
So the internal dynamics of equity and bond markets are not flashing amber despite the economic uncertainty.
What do investment managers think?
This week we got a glimpse of how fund managers feel currently. And similar to technical uncertainty measures, those who make the investment decisions have also regained their composure since the April fall-out. The Bank of America July Fund Manager Survey shows that investor optimism has reached a five-month high, with cash holdings decreasing to 3.9% and significant increases in US and European stock positions. Fund managers chose to put any cash that they had built up back to work in the markets. I’ve always seen this as a contrarian indicator.
As traditional market signals of stress and volatility are not revealing much in today’s environment, some asset managers are looking to novel approaches to gain an edge on market direction. Blackrock, the world’s largest asset manager, are tracking Trump’s use of capital letters in his social posts to tap market sentiment. They believe it has a powerful predictive component.
Market risk indicators are suggesting a “business as usual” scenario, but escalating trade tensions, attacks on central bank independence, imminent inflationary pressures, increasing deficits and slower growth could undermine this stance.
Tradewinds 