Friday, March 16, 2007

Market volatility and global economic growth

There has been a lot of up and downs on markets in the last weeks, and economist are wondering what is the explanation for such a sudden change , considering that the world markets have somehow assumed the oil prices increases shock, higher geopolitical risks, and some global disequilibrium. As always, in economics matters there is no easy answers. Like human body, what it fail at any moment, have an impact beyond its natural sphere , even though the health condition are good enough ,to overcome difficulties.-
The global economy looks pretty robust taking into account some of the available forecast. The IMF (preliminary draft) is expecting to have a global economic growth of 4,9% ,although at a slower pace than global economic growth of the year 2006(5,3%). This slower pace is founded upon the current adjustment in the USA economy, and the lingering question concerning its impact on global economy .It seems that such adjustment will moderate global growth, but not enough to reduce its dynamism. In fact the USA economy , according to the same IMF report, will have a GDP growth in the year 2007 of 2,6% ,somewhat below the 3,4 of the previous year, but Europe and Asia economic growth expectation, do not look fragile at all . So, it is plausible that the global economy is going through a slow down adjustment ,to a more sustainable long run economic growth.
All of the previous subject, are exogenous data markets , already considered by investors in their portfolio analysis, because of all the information currently at their disposal for investment portfolio managers. However, markets also include speculative forces; those who are trying to get the higher benefit, at the lowest risk possible . Therefore they follow not just the exogenous variables, but also the endogenous one before making profit maximizing decisions.
Which are the endogenous variables affecting markets ?: on the positive side it is creativity and innovation ,which allow for new product to shape market trends. This have been the driven force for quite a while on global economy, with new global players boosting global trade throughout services , technology and quality. But this positive factors ,coexist with negative ones such as rumours, worse than expected data, contagious pessimism about current situation ,political changes impact, and key economic sector expected performance(housing, construction ,manufactures).Both variables exogenous and endogenous, make the balance for the overall markets expectations and investor `s subsequent decisions . With rational economic agent ,which collect all the information necessary to make decisions, .this balance will always clear. However the path which it follows it is not without cost ,because not all the speculative investors have the same risk prone behaviour, some of them are more risk reluctant ,so they react more quickly and get the market forces behind them .-
In short ,markets behaviour are more independent from the fundamentals of the economy ,because they also considered this endogenous variables , given the fact that its adjustment velocity is faster than the economy as a whole. As Paul Samuelson has said: Stock Markets has anticipated 10 out of the four economic recessions. Therefore, volatility is part of the risk in markets behaviour. The market mood has high sensitivity to everything which might change the expected profit. In the process, it allows to correct those prices overvalued and those prices undervalued.-

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