Do markets know something investors do not? That has been the question posed over the past few weeks as they gyrated wildly despite economic indicators in the UK and other developed economies suggesting the recovery was broadly on track.
When markets have risen so far for so long, it is no surprise to see them become more skittish and investors become more downbeat about the returns they are likely to earn from here. That should not be a big concern for consumers, households or governments. The question is whether the market moves are actually signalling bad news coming down the track for the real economy.
The oil price and trouble in China have attracted the most investor attention. We do not think either of these pose an existential threat to the global recovery. But there is plenty of room for them to cause trouble, when expectations for growth in the developed world are still so mediocre.
Oil is a good example of this. The oil price usually falls as economies head into recession, and that is certainly what we saw in 2009. But the collapse in the price of energy we have seen over the past 18 months has not been accompanied by any fall in global energy demand.
What has changed fundamentally in this period is the supply side of the equation. The world is awash with cheap sources of energy from the US and elsewhere, and the big producers in Opec have neither the will nor the capacity to prevent that cheap energy from flooding the market.
The big jump in the oil price recently in response to suggestions Russia and Saudi Arabia might meet to discuss their oil production plans provided more evidence that it is the supply side of the equation driving the market right now, not any worrying fall in global demand.
As long as that is the case, most economists would stand by the view a further fall in the oil price since November is good news for the global economy as it puts more money into consumers’ pockets.
But there are short-term consequences from cheaper oil that are not so positive. One is it is going to be even harder for central banks to get inflation back up towards target. The Bank of Japan surprised everyone recently by taking the official policy rate negative to -0.1 per cent. The European Central Bank is likely to take its policy rate even further into negative territory in the next few months as inflation expectations slide back once again.
Cheaper oil also inflicts big losses for companies and investors who have bet large on energy. Unfortunately for all of us, the energy sector is disproportionately represented in the main stockmarket indices in the US and Europe, especially the FTSE. That means the bad news for investors is a lot more visible and immediate than the extra spending by consumers.
That extra spending is happening, however, at least in the UK. We had some reassurance on that front in the latest GDP data. A roughly 2 per cent rate of growth is nothing to write home about and the manufacturing side of the economy is struggling against a backdrop of little or no growth in world trade. But there is little in the numbers to suggest the economy is about to grind to a halt. It is a similar story in the US and across the Channel.
You might say it was poetic justice that investors are now nursing losses, even as households and the broader economy move ahead. After all, we had plenty of years after the financial crisis when the reverse was true; when stock and bond prices marched upwards even as household incomes were falling in real terms and the economy was flat.
It would not be the end of the world if markets now treaded water for a couple of years while the economy continued to grow. With a bit of luck, that is exactly what we are about to see. But it is difficult for us to be completely relaxed when policymakers’ room to respond to trouble is so much smaller than it was in 2008.
Stephanie Flanders is chief market strategist for Europe at J.P. Morgan Asset Management