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Economists don’t get what investors are so excited about

A bull in a field
Unsplash/Adam Morse
A bullish signal.
By Dan Kopf
Published Last updated This article is more than 2 years old.

Researchers at the OECD are perplexed. As far as they can tell, nothing much has changed about expectations for global economic growth in recent months. Still, stock markets are soaring.

Economists at the club for advanced economies recently released their latest global economic forecast, noting that since mid-2016 stock indexes have expanded rapidly as GDP growth forecasts have barely budged. According to surveys of economic forecasters, expectations for annual GDP growth over the next 10 years in the US, euro zone, and Japan changed by less than 0.05% over the past eight months—Japan’s outlook actually got worse. Still, the markets are bullish as can be.

“In financial markets, there are apparent disconnects between the positive assessment of economic prospects reflected in market valuations and forecasts for the real economy,” the OECD said in its report. “The improvement in market sentiment also contrasts with continued low growth of consumption and investment, which still lag well-behind previous recoveries, and the slowdown in productivity growth with persistent inequality”

In other words, researchers from one of the world’s leading intergovernmental economic organization can’t figure out why investors are so optimistic.

The surging stock market comes amid rising uncertainty about economic policy. US president Donald Trump’s promises of tax cuts and deregulation have buoyed investors, but economists are wary that his protectionist instincts and anti-immigration policies will eventually put a dent in growth (and by extension, corporate earnings). In Europe, populist groups with similar policies are gaining support in the Netherlands, France, and Germany ahead of elections. Japan’s economic prospects are comparably stable, but hardly spectacular.

As a result of these concerns, the global Economic Policy Uncertainty Index has been rising recently. The index, based on research by economists at Northwestern, Stanford, and the University of Chicago, is based on analysis (pdf) of media coverage about economic events. Usually, an index score above 200 suggests that investors should be rattled. Not this time.

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