U.S. economic uncertainty remains at near-record levels, and the stock market is at an all-time high. If history is any guide, something’s got to give.
That is the message flashing from an index of economic uncertainty created by three finance professors: Scott Baker of Northwestern University, Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago. Before this year, there was a strong correlation between increases in this index and falling stocks. In fact, based on this historical pattern back to 1900, the S&P 500 appears to be about 20% higher than it should be.
Such a signal might seem surprising in the wake of the close-to-final-resolution of the election and hopeful news on the Covid-19 vaccine front. But here is how the professors’ index works. The index is based on the frequency of mentions in major newspapers of words and phrases associated with economic uncertainty. In the accompanying chart, this index—known as the Economic Policy Uncertainty, or EPU, index—has retreated somewhat from its spike in April and May, but it remains nearly three times as high as its average over recent decades.
In an interview, Prof. Bloom explains that there are several ways in which heightened economic uncertainty hinders economic growth. It raises the cost of capital, for example, which means that businesses are unable to justify as many new projects as they would have otherwise undertaken. It causes both businesses and consumers to delay expenditures. And it reduces the effectiveness of government stimulus programs.
closing small businesses in March/April than again in Nov ‘ and some restrictions w opening “ hurt economy so bad only a true idiot would disagree ! Heartbreaking! Ask a bank about paying back car loans and mortgages so many are on deferments for past 9 months it’s scary
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They have been out of sync for many years. The COVID has shined a brighter light on it. Issues, policies, and politics have all shown we need better parity between the two. A few doing well while millions in food lines.
There is someone out there who needed econometric data to tell them that the financial markets and real economy were “out of sync”? I suppose it will require an Nth-order VAR analysis to demonstrate that the FederalReserve was one of the leading culprits in breaking the linkage?
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Let’s get smart people
This has been going on since spring.
When you have food lines and at the same time the Stock Markets are reaching all time highs ... There's your sign ...
Yes.
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