Weekly Updates
Weekly Updates
- Politicians are quick point to equity markets as proof of their policy virility, especially at election time. “Equities are up, so our policies are good.” This is potentially dangerous, and may result in narrowly focused policies that harm the economy.
- Across developed economies, it is small- and medium-sized businesses, not listed companies, that matter most to employment and GDP. Public sector employment and economic activity may also outweigh listed companies’ contribution. Obsessing about equity prices ignores the most important part of the economy.
- Listed companies are more likely to be global than the economy as a whole. It is difficult to justify political claims that a rising equity market is a positive reflection on domestic policies if at least half listed corporate earnings come from abroad.
- The false idea that rising equities are good and falling equities are bad is potentially very economically damaging. An asset bubble means rising prices, but misallocates capital in the economy (and does further damage when the bubble bursts). Conversely, a falling equity market that fairly prices more subdued economic activity is a good thing. If policymakers put in place biased policies that aim to push markets higher, asset prices will move further away from fair value. Mispriced assets are not an economic positive.
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