What You Need to Know About Friday’s Smackdown By Lucas Downey, Contributing Editor, TradeSmith Daily Market gyrations have been the norm in 2025, with stocks getting jerked around by headline after headline. Much of it has to do with uncertainty around economic policy. In other words, investors are getting spooked by what they don’t know. Whether it’s uncertainty around taxes, economic forecasts, trade policy, or new technology… Today there is no shortage of reasons to be concerned about stocks. Recently, while perusing a major financial outlet, I came across an index that measures this to a tee. It’s called the U.S. Economic Policy Uncertainty Index. It measures different variables around policy, including the amount of newspaper coverage on the topic of economic uncertainty, federal tax code provisions, and disagreements between economic forecasters. As you can imagine with all of the economic balls seemingly in the air right now, uncertainty is elevated. In fact, as I write this on Friday, major indices are down big including the S&P 500, Nasdaq, and small-cap indices. Now, conventional wisdom could have you want to hit the exit button on your portfolio and “wait this one out.” However, when you study history, you’ll learn that rarely pays off. Before we break down a powerful signal study on the history of elevated policy uncertainty, let’s first check in on markets… | Recommended Link | | | | While everyday investors keep piling into names like Nvidia, Apple, and Amazon… the owners of those very companies – Jensen Huang, Tim Cook, and Jeff Bezos – are dumping their OWN shares at a record pace. This is exactly what we saw 25 years ago… right before the dot-com crash wiped out millions of American’s portfolios. Now, “America’s top trader” is warning that big tech could be barreling right toward another dot-com style implosion.â¯Click here for the critical details. |  |
Economic Jitters Hit Stocks Hard On Friday, headlines were swirling around tariffs, federal debt concerns, and inflation. I even saw a headline suggesting President Donald Trump could remove federal funding to certain states. Needless to say, these numerous potential threats have woven a blanket of uncertainty around markets. On Friday alone just about all stocks were down, leaving investors few places to hide to avoid market pain. The S&P 500 (SPX), Nasdaq (NDX), and iShares Core S&P Small-Cap ETF (IJR) plunged. Here you can see a one-month chart for these baskets. Large caps are effectively flat while small caps are down nearly 6%: 
There’s no question that the latest downdraft was triggered by economic worries. A great way to visualize just how worried investors are is by referencing the U.S. Economic Policy Uncertainty Index (EPU). Using monthly data, February has clocked in at a reading of 331.7. That’s the highest level since COVID. Outside of 2020, this index has never been higher than today’s reading: 
Now, I get it. You’re probably thinking it’s time to button up risk and flatten out. After all, who wants to hang around with all of these issues? It sounds good in theory… But it doesn’t make money over the long term. Here’s why… The Hidden Truth Behind Elevated Policy Uncertainty Studying data has a way of cutting through the noise. It allows measurements that our naked eye often misses. And it tamps down our emotions, letting us think and act rationally. I went back and culled all monthly readings for the U.S. EPU Index. And in order to single out periods of extreme readings like today, I found all instances when the index was 200 or above. Back to 1985 I was able to locate 28 periods including notable uncertain times like the dot-com bust of 2001, the Great Financial Crisis of 2008 and 2009, and COVID-19 during 2020. Then I plotted the returns of large-, mid-, and small-cap indices going forward. Here’s where a juicy trading setup emerges. During elevated policy uncertainty when the U.S. EPU has a reading of 200-plus, the S&P 500, S&P MidCap 400, and S&P SmallCap 600 are all down one month later, with returns of -0.7%, -0.6%, and -0.7%, respectively. Go ahead and turn that frown upside down. What happens next is the hidden truth behind elevated policy uncertainty. Three, six, and 12 months later, all three of these benchmarks surge, with notable performances of: - Six-month gains for large, mid, and small caps of 12.1%, 18%, and 20.7%, respectively
- 12-month surges for large, mid, and small caps of 21.9%, 29.8%, and 34.9%, respectively
Hopefully it’s crystal clear what to do. Embrace the near-term dip. Buy great stocks on sale. Ride the rip. This is what history tells us to do. Now’s the time to get your buy list ready. The next few weeks could prove bumpy… And you’ll want to have dry powder to strike. Using TradeSmith’s tools will help you navigate and get the green light when the coast clears. Now that’s a game plan. Are you ready? Regards, Lucas Downey
Contributing Editor, TradeSmith Daily P.S. Recently, our CEO, Keith Kaplan, came out with a forecast of his own. Looking through the data, he’s found evidence that we’re in the middle of a massive melt-up in stocks like we haven’t seen since the mid-’90s… and before that, the Roaring ‘20s. If the price action last week has you doubting that call, look again at the forward returns I plotted above. On all timeframes past the very short term, stocks are up MUCH more than the long-term market averages. You pay for gains like these with the pain of volatility. It’s par for the course. But we at TradeSmith aren’t running from this volatility. We’re looking at it as a very temporary window to take advantage of low prices before this market continues delivering abnormally high gains for the next 12 months. Keith’s putting on a free research presentation all about the Mega Melt-Up this Thursday at 8 p.m. Eastern. There you’ll see all the reasons why we’re so confident in the Mega Melt-Up thesis… get 10 stocks to play it (and 10 to avoid)… and learn about a powerful new strategy that turned every 4 out of 5 trades into winners, with gains of 16% over just 21 trading days. Click right here for the full details on this week’s Mega Melt-Up Event. | 
