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.
It remains to be seen how robust the capital formation mechanism can be in these circumstances. The leading signs are not promising.
The IPO market is a key financial staging post for emerging high-growth companies seeking to raise capital. After as many deals were pulled in the first half of the year as were completed, the market closed in Europe over the summer and bankers aren’t sure when it might reopen. Just four IPOs were completed in the US market in August, traditionally a quiet month. Seventeen US IPOs were postponed or withdrawn, the most in a single month since December 2008.
