Equity prices and the global economy

​FT reporters explain what’s behind US stocks which suffered their worst fall in more than six years, erasing gains for the year.
Paul Lewis
Feb 08, 2018

Investors who expected a period of calm have been confounded, they write. Whether or not one views the recent falls as anything more than a technical correction is a matter for the chartists, as John Authers explains in several very useful charts.

For corporate strategists, the movement in US equities raises fundamental questions about the global economy, wages, inflation and productivity. The FT’s economics editor, Chris Giles, asks ‘whether the economic outlook in the US and around the world has changed sufficiently to justify weaker financial prices, or whether the correction has come without a definitive trigger.’

He cites 2.9% growth in hourly wages in January, the highest annual rise since 2009, as evidence that the US economy might soon run into the normal capacity constraints. This in turn would empower the hawks in the Federal Reserve to raise interest rates.

It’s not just the US. The Eurozone and China are also performing strongly, ‘suggesting long-quiescent inflation might be beginning to stir.’ The global economy overall is growing at a 4.5%, and advanced economies are expanding beyond sustainable rates. If market interest rates rise this would dampen bond and equity prices.

However, ‘if global economic prospects improve more rapidly than expectations of higher interest rates, write Mr Giles, ‘high valuations for equities would still be justified.’ Moreover, there may be some slack in the system, especially in Europe. Eurozone unemployment at 8.7% provides scope for non-inflationary job creation. According to analysts, the rise in hourly earnings might have been driven by an ‘unusually large’ drop in recorded hours worked.

What signs should business leaders watch out for? One important indicator would be more marked wage inflation in the US spreading to other tight labour markets, such as Germany or Japan, which would deepen fears about valuations.

Paul Lewis

Editorial Director at Headspring