Stock Market Moves Will Not Happen Off Government Spending

If you think the Government should spend more to revive the economy – in the way of a good old fashioned Keynsian – then you’re wrong. If you’re a supply sider thinking that monetarism and Reagonomics are the answer – you are wrong too. The answer for stocks lies elsewhere.

Government spending is not impacting GDP. If the link held true in the past, then like many economic links, it does no longer as strongly or at all. Time and observation erodes certainties in economics. The chart illustrates the point. Anyway, as the public sector retreats, the private sector has less competition and often fills the gap.

As for Reagonomics and supply side policies – they all end up resulting in government spending anyway – so end up being Keynesian and as already pointed out – that link does not hold.

So whereas the link between GDP and company earnings holds, and earnings are the best predictor of share prices, so it is that we need to look elsewhere. Confidence is a far better measure than QE (moneterims) or Government spending (Keynesian) measures if you want to get a broad grip on the future direction of markets. And business confidence is the best measure of confidence.

 

Alpesh Patel, founder free education website AlpeshPatel.com

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