What’s moving the markets now?
Photo by Oren Elbaz on Unsplash
When the economy was recovering from the pandemic-induced recession, inflation seemed to be one of the least worries for US economists. Fast forward to today, US inflation reached an unexpected 40-year high of 8.6%. Earlier in 2021, US Treasury Secretary Janet Yellen told CNN's Wolf Blitzer on “The Situation Room” that inflation posed only a small risk. Recently, Yellen admitted that she was wrong in understanding the path inflation would take and how long it would last. The current inflation has been driven primarily by several unforeseen global events such as the Russia Ukraine situation, multiple Covid variants, and lockdowns in China. Some other recurring problems behind inflation are supply chain bottlenecks, excess demand over supply, labor shortages, and other issues.
With rising inflation, we are yet again staring at a recession in the coming periods that has lowered market sentiments. The S&P 500 is down more than 20% since the beginning of 2022, registering its worst first-half growth since the 1970s. Dow Jones and Nasdaq are on the same path, recording a 15% and 30% fall respectively. All three indexes reported their second consecutive negative quarterly return that was previously seen in 2015.
Investors and major fund houses are waiting for further data from companies and consumer expectations before making significant investments. As a result of rising inflation, a rate hike by the Federal Reserve is expected to slow down the economy, leading to a further slump in stocks.
Inflation and Fed Rate Hikes
Recent inflation has led to a 180-degree turn by the US Federal Reserve that is tightening its stance and increasing interest rates to record highs. To combat rapid inflation, the US Federal Reserve raised interest rates by 75 basis points, the largest rate hike made by the US central bank since 1994.
Federal Reserve Chair Jerome Powell and other Treasury officials have previously pointed to further rate hikes even if it meant jeopardizing economic growth. Many economists and market experts have pointed toward a recession for the US economy in the coming time. A recent study by McKinsey among European consumers showed rising prices as the top concern with 2 out of 3 consumers having a negative feeling about the economic status of their country.
Global Investor Sentiments
The whole world is facing an economic conundrum with rising inflation that is caused by supply chain issues arising from the backdrop of the Russian-Ukrainian situation. A global recession is already in the works with the majority of the world’s advanced economies such as Italy, Germany, UK, China, Japan, and many more observing record-high inflation. Investors around the world have become fearful and hesitant to make further investments in the markets. Due to this, we can expect a global decline in the stock markets.
What is the verdict?
The current data points towards a recession that will remain. Any major updates on the Russian-Ukrainian situation and China’s Lockdowns could have a huge impact on the global economy. According to some experts, the US economy will experience stagflation, which is characterized by a drop in growth rates and an increase in prices. European nations continue to be affected highly by the impact of surging energy prices which has resulted in a record high inflation of 8.6%. The European Central Bank is planning a rate hike for the first time in 11 years to combat inflation. Berenberg economists have predicted a recession in the euro zone in 2023 with a GDP (gross domestic product) contraction of 0.8%.