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Four reasons economists have divorced equities

| Posted by: Paul Donovan | Tags: Paul Donovan

  • Equities continue to fall, while economies remain resilient? Four possible reasons for the divorce: 1. Listed companies are a tiny part of the economy (about 15% or so). Small businesses are far more important.
  • 2. Equity markets are disproportionately weighted to energy, financials and manufacturing. Weak energy prices, regulation or currency strength will hit equities far more than they hit the real economy.
  • 3. Equity companies that generate earnings from overseas subsidiaries are vulnerable to overseas demand shifts, without affecting domestic economic activity at all.
  • Equity markets tend to react to initial economic data releases, but data is being revised more often, with larger revisions, and generally economic data is being revised up. The real world may not be the world that equities react to.