Examining the uncertainty premium
Barbara Reinhard, CFA
CIO, Multi-Asset Strategies and Solutions
The U.S. Economic Policy Uncertainty Index recently spiked to levels not seen since the Covid-19 pandemic. As of March 2025, the index has risen past 700, which is many multiples of the historical average. That has a couple potential implications for markets—the least of which is more volatility.
What is the Economic Uncertainty Index? Created by economists Baker, Bloom, and Davis, it tracks government policy uncertainty using a weighted blend of media coverage, tax code expirations, and disagreement among economic forecasters. When the index rises, it’s often a sign that markets are bracing for unpredictable fiscal, regulatory, or geopolitical developments.
Drivers of the current uncertainty spike include heightened geopolitical risk, mainly ongoing ambiguity around trade policy and geopolitical alliances. The elevated level matters since historically, high levels of uncertainty act as a drag on economic growth, as firms tend to cut back on investments and hirings. Elevated levels of uncertainty are also associated with increased levels of stock market volatility and foreshadow declines in key economic indicators such as industrial production, investment and employment.
For equity markets and investors, this can mean continued levels of higher volatility and a tilt toward defensiveness. With the policy path unclear, the risk premium investors demand tends to rise.
Maverick Lin contributed to this article.