Often when the economy is showing signs of improvement share markets take a tumble. This perverse share market behavior is sometimes explained by the way that the share market looks beyond the present to what may happen next. An improving economy tends to place upward pressure on inflation and interest rates and that in turn leads to the next downturn in the economy and with that comes softer growth in company earnings. The share market also tends to do the opposite when the economy is weak anticipating better times ahead and rallying ahead of any improvement in the economy.

This so-called dichotomy between Wall Street and Main Street may explain a little of the sharp fall in global share markets in the first week of 2016. Indeed what economic numbers have been published over Christmas and the early part of the New Year point to quite robust economic growth in the United States; a little better growth in Europe and some signs of better spending in Australia too.

In the case of the US manufacturing activity is still languishing – the December ISM manufacturing index fell further below the 50 expansion/ contraction line to 48.2 from 48.6 in November and November factory orders fell 0.2% in the month. In contrast, services activity, accounting for over 90% of US output these days, remains very strong with the December ISM non-manufacturing index at 55.3, admittedly down a touch from 55.9 in November, but still well above the key 50 reading. The US economy continues to generate large numbers of new jobs. Non-farm payrolls were much stronger than expected in December lifting by 292,000 after upwardly revised gains of 252,000 in November and 307,000 in October.

US economic strength is causing the Federal Reserve to start lifting its Funds rate consistent with market behavior reflecting the Wall Street/Main Street dichotomy, but the strong indications from the Fed that it will lift rates very cautiously in the current cycle should imply a more subdued market sell down this time around, not the record early New Year falls recorded in global share markets in 2016.

Similarly it is hard to see why European economic readings should have generated such a sharp share market sell down. The European December services sector PMI lifted to a healthy 54.2 from 53.9 and rather like the US, Europe is at last starting to generate jobs quite consistently causing its unemployment rate to edge down in December to 10.5% from 10.6% in November. Importantly, even though the European economy is showing signs of improvement, the European Central Bank has promised to maintain very easy monetary conditions through to at least March 2017. In short, European economic conditions are providing support for growth in the earnings of European companies and look set to provide support for some time.

In Australia too, parts of the economy are improving – notably services and retail trade (retail trade rose 0.4% in November after an upwardly revised 0.6% gain in October promising robust growth in Q4 household consumption a key plank for GDP improvement) and the clearest message from the RBA is that the local cash rate will either be unchanged at 2.00%, or lower, for some time to come. Australia still has potential restraints to growth from declining mining investment spending and a housing activity showing signs of topping out, but the balance between improving and deteriorating parts of the economy still points to moderate economic growth persisting for some time to come and without any cause for policymakers to start placing restrictions in the way of growth.

The Wall Street/ Main Street dichotomy seems to explain very little of what has been happening in global share markets and neither should it be particularly strongly in play given unusually slow monetary policy tightening in the US and extended monetary accommodation elsewhere.

A large part of the explanation for share market falls comes down it seems to a curious contagion from perceived problems in China. December PMI readings for manufacturing and services generated by the private organization, Caixin, were both disappointing – manufacturing PMI down to 48.2 from 48.6 in November and services PMI down to 50.2 from 51.2. There is also evidence that producer prices in China remain deeply entrenched in deflationary territory – unchanged at -5.9% y-o-y in December. China’s financial markets have been under pressure. The share market has been giving back much of its gains over the last few months of 2015 and capital outflow has risen placing downward pressure on the Yuan. China’s regulatory authorities appear to be struggling to cope and deal with market forces adding to concerns internationally.

It is possible that developments in China mean the economy may suffer further growth slowdown bordering a hard landing, but the probability of such an occurrence is not high. The authorities have been easing policy conditions and will almost certainly continue to do so as long as they have any concerns that growth threatens to be too weak. Most likely, evidence will start to show that past policy easing is starting to gain traction, possibly even as soon as the run of key December economic readings and Q4 GDP report due next week.

2016 has started on a very weak note for risk assets but on calm assessment of economic developments the selling appears to be overdone. One consequence of the sell down in risk assets is that one of the more certain outcomes is that low interest rates look like persisting for some time.