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Despite equity drops, economies are growing above trend

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

The drop in global equity markets is not economists' fault. This is a technical move. The global economy is still growing a bit above trend. The risk of a global recession in 2018 is very, very low. Inflation will rise modestly. Central bank tightening is slow. Central banks do not want lower inflation. Central banks are not trying to lower economic demand. Central banks are not attacking companies' pricing power. Central bank policy is not hostile to equities.

Economics did not cause equities to drop, but the equity drop might have economic effects. Equity drops matter in two ways. Lower equity prices might raise the cost of capital for companies. In reality, this is not a problem now. Borrowing costs remain low. Companies are cash rich. Small businesses are the companies that matter economically, and they have access to bank funding.

Equity investors may feel a negative wealth effect from lower equity markets. People value a loss about twice as much as a gain. However, equities are not that widely held. Only about half of Americans own equity at all. The strength of the labor market is more important to consumers.

Economies should remain strong. This supports good company earnings.