Assessing Yellen's Warning That Markets Pose a Threat to Economy
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2016-02-11
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Investors were pleased Wednesday when Federal Reserve Chair Janet Yellen said weakening stock prices pose a risk to the economy, convinced she won’t rush into more rate hikes.
But how should everyone else feel with stocks down 10 percent in a year?
While far from definitive, evidence exists that equity prices hold clues to the economy, either portending or influencing future growth.
A study by the research firm CXO Advisory Group LLC in July 2014 found that changes in gross domestic product only “very slightly” forecast the Standard & Poor’s 500 Index over the next few quarters, while stock signals for the economy are more robust.
Bloomberg data shows that since 1929, bear markets have come on average nine months before the start of recessions.
Yellen’s testimony before the House Financial Services Committee addressed the possibility markets might contribute to a contraction, rather than simply signal one.
But how should everyone else feel with stocks down 10 percent in a year?
While far from definitive, evidence exists that equity prices hold clues to the economy, either portending or influencing future growth.
A study by the research firm CXO Advisory Group LLC in July 2014 found that changes in gross domestic product only “very slightly” forecast the Standard & Poor’s 500 Index over the next few quarters, while stock signals for the economy are more robust.
Bloomberg data shows that since 1929, bear markets have come on average nine months before the start of recessions.
Yellen’s testimony before the House Financial Services Committee addressed the possibility markets might contribute to a contraction, rather than simply signal one.
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