There is a simple reason why for the past decade, despite all the rhetoric central bankers have been focusing on just one thing – reflating risk assets in general and the stock market in particular – because if you get stocks higher, everything else will eventually follow; call it the “wealth effect and confidence pass thru channel.”

This observation forms the basis of a report released overnight by Goldman’s economics team, which claims that the 26% increase in the stock market since the start of 2017 “has been the most important driver of the recent easing in financial conditions, which are now at their easiest level since 2000”, something we showed yesterday.

So what has been the stock market’s contribution to the economic rebound since the Trump election? Here Goldman estimates that “higher equity prices are currently boosting GDP growth by nearly +0.6pp, and account for about two thirds of the +1pp growth impulse from overall financial conditions.” 

Of course, the market impulse has to continue – i.e., the market has to keep rising – or else the economic response becomes muted: “Our base case is that the equity impulse to growth decelerates to +0.3pp by Q4 as equity price gains slow” Goldman explains.

For the econometricians, here are some further insights from Goldman on the favorable economic effect from rising stocks

We have argued that the most important reason for the acceleration in growth last year and for growth optimism in 2018 is the sharp positive swing in the impulse from financial conditions, which are now at their easiest level since April 2000. The run-up in the equity component of the FCI has accounted for rughly half of the 137bp index easing in 2017 and 80% of the of 32bp easing year-to-date (Exhibit 1).

…click on the above link to read the rest of the article…