Maybe "economic policy uncertainty" is just firms disliking regulation
Why did economic policy uncertainty rise strongly in 2016, but the stock market is doing well?
But that result [from the model in their earlier paper which says that uncertainty is bad for stocks] assumes that the precision of political signals is constant over time. In contrast, we argue here that political signals have become less precise in recent months, especially after the November 2016 election.
They state that Trump on one day says this and on another day says that. And that therefore firms get more noisy signals about the future course of economic policy and that the lack of a signal isn’t the same as uncertainty over outcomes. Their argument was also covered by the German daily FAZ (in German).
I’m not completely convinced. Maybe much of what we refer to as “economic policy uncertainty” is just firms being annoyed at regulation. Regulation, justified or not, is likely not great for corporate profits. Baker, Bloom and Davis (2016) think (especially of their industry-specific) indices as measuring “regulatory policy uncertainty” (p.1621). But what if it’s more a proxy for “regulatory policy”?
It’s like when people say “risk has gone up”, they often only refer to downside risk. With Trump, I think, actual “uncertainty” (or what Pastor and Veronesi call “the precision of political signals”) is up, but the expected value of how much regulation there will be is far down. So expected profits rise and thus stocks benefit. But at the same time the newspapers are full of the words “uncertainty”, because there really is uncertainty about the future course of regulatory policy.