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Five reasons to be less fearful of feedback

| Posted by: Paul Donovan | Tags: Paul Donovan

  • Feedback loops from equities to the real world may not be what they were. 1) the composition of equity markets is radically different from the composition of the real world (the US S&P is skewed to manufacturing and mining, the economy is 85% services)
  • 2) Listed companies are relatively minor contributors to growth, and the current economic recovery is SME focused. 3) A higher cost of capital from equity markets is not a problem for corporates, as capital is not really a constraint today
  • 4) Equities are not held directly by many people. Housing wealth is more significant, and employment more significant than wealth. 5) There is little evidence of equity moves damaging real world confidence yet (per evidence from Google Trends)
  • We do have the delights of Draghi of the ECB speaking today at the conclusion of the ECB policy process. To focus too much on economic risks would perhaps give an impression of panic.