In a perfect world, investors would turn to economists for predictions on two key issues supporting equity prices at current valuations: productivity trends and the effectiveness of macroprudential policies. In the real world, however, I suspect many investors have yet to grasp the extent to which these arcane topics will influence the next stage of the market cycle; and those that do may get insufficient guidance from economists.
Let’s start with some context. While counterfactuals are tricky, most market analysts would agree on two related market hypotheses: first, that unusually sluggish economic growth has not harmed stock market performance as much as would have been expected from traditional models; second, that hyperactive central banks have boosted asset prices using experimental measures, not as an end in itself but as a means of stimulating higher economic activity through the “asset channel”. The result has been a notable gap between a buoyant Wall Street and a struggling Main Street.