Even though the sharp equity declines have stopped, such volatility is not at all inviting for investors seeking to allocate exposures; if prolonged, such skittishness in financial markets might soon start to affect the real economy. The most obvious way in which a negative feedback loop forms between financial markets and the economy is in the damage to manufacturers’ confidence following hefty falls in the stock market. The sell-off that began in early July was quickly followed by ugly readings from various confidence and manufacturing surveys by regional Federal Reserve banks in the US that are themselves often harbingers of recession.
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