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Different growth

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • The 2010 economic recovery was uneven. Low bond yields helped large firms. Emerging market growth helped trade recover. Trade helps large firms. Weak bank lending hurt small firms. Weak intercompany credit hurt small firms. Small firms cannot issue bonds. Small firms are less likely to export.
  • 2010 was a big business recovery. The equity market liked that. But the equity market is not the economy. Large firms are only a quarter of the US economy. Small firms slowed the economic recovery.
  • Economists see little risk of a recession in the near term. The global economy is likely to slow. The US tax cut "sugar high" will fade. China cannot stay above its trend growth for ever. But domestic demand is good in Europe and the US. Inflation has risen, but there is little sign of overheating. Central banks are cautious in their policy. Real interest rates are near zero in the US (below zero in Europe).
  • However, some of the policies that boosted big business are fading. Bond yields are up. The US is taxing trade. Small businesses care less about this. The economy should stay strong. But these things matter more to equities than to the economy, hence recent market volatility.