Economic-Policy Doubts Cast a Pall Over Stocks: Chart of the Day

Growing doubts about the direction of U.S. economic policy may limit any stock-market gains in the next few months, according to Myles Zyblock, chief institutional strategist at RBC Capital Markets.

The CHART OF THE DAY displays a policy-uncertainty index that Zyblock cited in a note to clients yesterday. The gauge rose in May after dropping for five months in a row, and the increase offset most of the decline during that streak.

“Uncertainty has started to ramp up once again,” Zyblock wrote. He mentioned three reasons for the shift: this year’s presidential election, debate over increasing the federal debt ceiling, and a so-called fiscal cliff that may result from tax increases and spending cuts set for early next year.

Share prices may suffer along with consumer spending, hiring and investing because of “this domestically focused headwind” regardless of how the European debt crisis unfolds, the Toronto-based strategist wrote.

The Economic Policy Uncertainty Index set a record last August, when a near-failure to reach agreement on raising the debt limit led Standard & Poor’s to reduce the country’s credit rating from AAA for the first time.

The indicator is derived from estimates of U.S. economic growth and government purchases, Google News search results, and the number of expiring provisions in the federal tax code. Scott R. Baker, a graduate student at Stanford University, created the gauge with Stanford Professor Nicholas Bloom and University of Chicago Professor Steven J. Davis.

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