![]() We've seen a really big correlation between equity prices and discretionary spending."įed officials, though, might not mind seeing some of the froth come out of Wall Street.įor the central bank, inflation remains its main problem, and that has come from supply that has been unable to meet with relentless consumer demand for goods over services. "Consumers have been big buyers of equities ever since 2016, in particular. "Consumers are extraordinarily involved in the equity market, and the Fed has put them there," said Steve Blitz, chief U.S. The Fed has bought more than $8 trillion in bonds since then in an effort to keep rates low and maintain the movement of cash through the economy, and that includes the financial economy. Indeed, the Federal Reserve is a major component as well in the link between the markets and the economy.Ĭentral bankers always have been attuned to market gyrations, but following the 2008 financial crisis, monetary policy has even more so relied on risk assets as a transmission mechanism. That's another reason why the Fed has to watch this." Where the Fed fits in For most companies, their main cost of capital is labor. "Companies manage their share price, and they want to make sure those projections remain intact as best they can maneuver that," said Quincy Krosby, chief equity strategist at LPL Financial. The first place they usually look: payrolls.Įmployment has been rising at a steady pace over the past two years, but that can come to an end if the current market tumult persists. If revenue growth gets weak enough, companies then have to find a way to cut costs to make their bottom-line numbers. "That's another element of the line between what's happening in the equity market and economic growth." Their cost of capital is also a lot higher, therefore they're not going to be able to expand as aggressively," he added. "If stock prices are down, it's much more difficult to raise equity. "In addition to the wealth effect on consumers, does affect investment decisions by companies, particularly the high-growth companies, the tech companies, that rely on raising capital through the equity market to finance their growth," said Mark Zandi, chief economist at Moody's Analytics. There's also another important point: Companies, particularly innovation-heavy Silicon Valley firms, constantly need to raise capital and look to growth in their stock prices to do so. In turn, that triggers a market reaction that spills back into less wealth on consumer balance sheets. The decline in spending slows sales growth and makes share prices less attractive when compared to future earnings. Stocks and consumer confidence historically have been linked closely, so when stocks fall people tend to curtail spending. ![]() The transmission mechanism between the market and economic growth is multipronged but fairly simple. Personal Loans for 670 Credit Score or Lower Personal Loans for 580 Credit Score or Lower Best Debt Consolidation Loans for Bad Credit
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