• • Over the past year, equity markets have been declining as problems in the financial sector have fuelled risk aversion and the earnings outlook has deteriorated. In the US, the equity market is now flirting with bear market territory.
  • • The plunge in equity wealth - in the US as well as globally - adds another headwind to the economy on top of the housing market correction, tighter credit, and rising commodity prices. However, for a number of reasons the economy is currently less sensitive to equity market swings than during the previous downturn in 2000-2003. Firstly, household equity holdings now account for a smaller share of household balance sheets and are smaller relative to disposable income. Secondly, corporate imbalances are smaller this time around.
  • • During this expansion, equity markets have been much less important for GDP growth than in the previous expansion. Over the past four quarters, the stock market has turned from adding a modest ½pp to GDP growth to subtracting a modest ¼pp from growth. Unless equity markets weaken significantly further, this headwind is not set to intensify much.