Bank of America Merrill Lynch told clients there is a growing disconnect between an overly optimistic Wall Street and pessimistic Washington on President Donald Trump's economic agenda.
Normally these sides are in sync with one another, so Bank of America Merrill Lynch's Michael Hartnett said something has to give between the two points of view. That could be bad news for Wall Street.
The CBOE Volatility Index (VIX), or "fear guage" is near decade lows on a steadfast belief the Trump administration will deliver on his tax reform, deregulation and infrastructure plans while forgoing the protectionist promises to his base.
On the other hand, D.C. is in disarray in the president's first two weeks as he signed executive orders restricting immigration and fired verbal nationalist shots at many key trading partners from Mexico to Australia.
This tumultuous start has been captured by a surge in the global economic policy uncertainty index, which measures D.C. fears by looking at things such as differences in economic forecasts:
Source: Bank of America Merrill Lynch
Hartnett even made a comparison to the late-1960s social and economic upheaval in the note to clients Friday. The widely followed strategist believes traders should watch gold and fixed income yields as the "tell" that trouble is ahead.
"Watch (as then) for the combo of rising yields and rising gold prices to signal impending market volatility (note also both 1973-74 stock market crash & 1987 Black Monday preceded by three quarters of rising bond yields & rising gold)," he wrote.
Hartnett doesn't quite think the market will falter yet unless the Fed starts to aggressively raise rates or Trump's agenda completely falls apart.
For investors who want to trade a coming volatility surge, there are certain ETFs that can do well in those periods. Using hedge fund analytics tool Kensho, we looked at what happened to major ETFs when the VIX moved higher by 3 points in five days, something that's occurred more than 100 times in the last decade.