“the stock market now drives the economy” - investors who believe this would argue that the link between equities and the economy is the (1) wealth effect which the Fed began focusing on under Bernanke, and (2) financial conditions which also became a greater focus under Bernanke due to the impacts of changes in the Fed's balance sheets on treasury yields, corporate bond yields, equities, and other areas of the financial markets. As evidenced above, this is a phenomenon that has been in existence since the GFC and relates to Fed balance sheet policy. I'm a fan of your cyclical economy framework but I don't believe your appreciating the link between equities and the economy being a more modern phenomenon.
All of this will be tested in this cycle as this is the first time yield curve inverted for longer period of time, since 2006. When (or if) the aggregate economy starts falling appart, my guess is that stocks will collapse big time. But if you think aggregate economy is being held up by stock market, than 2022 fall should have affected the employment rate at least a bit. But it did not touch it at all. But once unemployment rate starts going up due to aggregate economy weakness the stock market will follow big time. And money will be moved in to the bond market which will drive long term yields much lower and short term yields will follow.
“the stock market now drives the economy” - investors who believe this would argue that the link between equities and the economy is the (1) wealth effect which the Fed began focusing on under Bernanke, and (2) financial conditions which also became a greater focus under Bernanke due to the impacts of changes in the Fed's balance sheets on treasury yields, corporate bond yields, equities, and other areas of the financial markets. As evidenced above, this is a phenomenon that has been in existence since the GFC and relates to Fed balance sheet policy. I'm a fan of your cyclical economy framework but I don't believe your appreciating the link between equities and the economy being a more modern phenomenon.
If stock prices rising boots the economy, which then boosts stock prices, what, in your view, breaks this circular loop?
All of this will be tested in this cycle as this is the first time yield curve inverted for longer period of time, since 2006. When (or if) the aggregate economy starts falling appart, my guess is that stocks will collapse big time. But if you think aggregate economy is being held up by stock market, than 2022 fall should have affected the employment rate at least a bit. But it did not touch it at all. But once unemployment rate starts going up due to aggregate economy weakness the stock market will follow big time. And money will be moved in to the bond market which will drive long term yields much lower and short term yields will follow.