By Ian Salisbury

President Donald Trump's style of rapid-fire governing is creating a lot of uncertainty for the stock market. That might not be such a bad thing for investors.

Just over a month into his second term, Trump has dominated headlines with many executive orders, cuts by the Elon Musk-led Department of Government Efficiency, and tariff threats. The head-spinning pace has kept traders discomfited. Counterintuitively, a little extra anxiety may be what the market needs with the major stock indexes close to their highest levels on record. The S&P 500 is about 2% below its record of 6,144 set on February 19.

"If people are worried about something, they are automatically cautious, " Jim Paulsen, a veteran market watcher and author of the Paulsen Perspectives newsletter, tells Barron's. "They're not going for home runs, they aren't being too aggressive. They are paying attention to the Ps and Qs in their portfolios."

Paulsen, in a note published Monday, points out that uncertainty has spiked on several different policy fronts, including trade, fiscal, and monetary, since Trump's election.

He noted the U.S. Economic Policy Uncertainty Index -- a gauge developed by three academics tracking data like anxious news articles and misses by economic forecasters -- is at its highest level at any time since the mid 1990s, except for a brief spike during the pandemic.

While that might seem unsettling, Paulsen goes on to point out that the market actually tends to perform better, not worse, following elevated readings.

"The stock market more frequently struggled when there is calm and complacency surrounding economic policy rather than when intense concerns and questions surround what the Federal Reserve, Congress, or the President may do," he writes.

In other words: One way to view the situation is that the White House is a stress test for the stock market, and the market has passed so far. Paulsen says that while he remains generally bullish, he expects a market correction -- a 10% decline -- this year.

So what are investors to do? "I would take some of your winners like technology, consumer discretionary, financials and reallocate funds to utilities, staples, and pharma," he says. "I would rather ride through that with a little bit of defense."

Overseas stocks could provide another ballast. Although European stocks have been rallying -- the iShares Europe exchange-traded fund is up 11% in 2025 -- they still trade far more cheaply than their U.S. counterparts. The ETF trades at 14 times 2025 earnings, compared with nearly 20 times for the S&P 500.

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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February 25, 2025 02:30 ET (07:30 GMT)

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