A shock to market confidence -an end to irrational exuberance -could lead to sharp price falls.
Writing on Tuesday, Oxford’s global head of macro research GabrielBSE 2.53 % Sterne argued that a 10 per cent fall in global markets, caused by a reduction in “irrational exuberance,” could have the potential to wipe as much as 0.3 per cent off growth in major economies. “Given the extent of overvaluation currently, a shock to market confidence -an end to irrational exuberance -could lead to sharp price falls,” Sterne wrote in the note.
“But there are also more fundamental risks, including disappointing global growth, a reversal in lowflation, a slowdown in China and further setbacks related to Trump’s policy initiatives.” It should also be noted that Oxford’s note was circulated prior to the recent escalation of tensions between the USA and North Korea, which has already had a marked negative impact on global sentiment.
Stocks around the world have rallied strongly during 2017, with all three major benchmarks in the USA frequently breaking to new record highs this year. The pattern has been similar in the UK, where in January the FTSE 100 went on a streak of more than 10 days of consecutive new highs. “Those days could be close to an end.”
“A 10 per cent decline in equities triggered by a loss of market confidence would reduce the level of both consumption and GDP on average by a little over 0.3 per cent across advanced economies, according to our model simulations, with the peak impact occurring after four to six quarters,” Sterne continues.
“The impact is broadly in line with the intuition that the magnitude of the impact on consumption will be higher: (i) the more wealth consumers start with; and (ii) the sharper is consumers’ reaction to any given change in wealth.”