First published: Prospectmagazine.co.uk, 25/01/2016
“Recessions normally follow a marked drop in job creation—but the opposite is happening”
On Friday last week, global equity markets perked up, bringing some relief to what has been a dire start to the year. About $7 billion has been wiped off share values since the high point of 2015, over half of which happened since the start of January, as measured by the Morgan Stanley index of global stock market capitalisation. Since most major markets are about 20 per cent or more lower—the Shanghai Composite is down about 40 per cent—this is a bear market. Could this financial turbulence spill over into the real economy and trigger a global recession, as excitable analysts are already predicting?
Unstable markets might be presaging economic woe because stock prices tell us something about expected company earnings, which constitute one lens through which to see the economic future. In December, before the current sell-off began, equity markets shrugged off some important signals of impending trouble. These included the narrow breadth of advance in markets, that is the number of stocks and sectors going up in price; the rise in credit spreads, or the extra premium that lesser rated companies have to pay to borrow; and the Federal Reserve’s first step to raise interest rates in a decade….Read more:
