Boom/Gloom Index shows sentiment remains positive

Economic growth

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Index Sept13US and UK policymakers have been more upbeat recently in claiming that “the economy was turning a corner”.  Although they have not yet gone as far as in September 2009, when the G20 issued a statement that began “It worked!”, and claimed the recession was now over.

Helpfully, the IeC Boom/Gloom Index has again done its job in capturing this improved sentiment.  As the chart shows, it has climbed steadily since January (blue column), whilst the US S&P 500 Index (red line) has made record highs thanks to the support of the various stimulus programmes (yellow arrows).

But sentiment can change very quickly, and can often be quite different from the fundamentals.  This, after all, was the reason that the blog first introduced the Index back in June 2009.  And although the Index has moved into positive territory, it is well below earlier peaks.

This mirrors Mario Draghi’s new caution as head of the European Central Bank (ECB) when warning“I can’t share the enthusiasm” about budding growth in the euro zone. “These shoots are still very, very green.”

One very senior executive certainly shared this caution when talking to the blog this week.  He suggested his network of business partners were united in feeling conditions were going backwards, not forwards.  This confirms the blog’s own sense that the global economy is at yet another crossroads.

The key question is simple:  Are policymakers and the markets correct in their belief that the problems are now behind us?  Or do we need more evidence before opening the champagne?

The key will likely be the impact of today’s much higher interest rates on the real economy.  If these have no impact on demand, then we can assume that markets have done a good job in being forward-thinking with their optimism.

But if, as the blog fears, the recent summer-long party is followed by a cold winter, then today’s financial market celebrations may well look premature.

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