Is inflation about to spell trouble for the stock market?

Is inflation about to spell trouble for the stock market?

US inflation hit its highest level since the 1990s in October and has now reached a rate that, historically, has coincided with very poor stock market returns. Notwithstanding the uncertainty around the impact of the “Omicron” variant of the coronavirus, we don’t expect inflation to stay at quite such high levels, so we aren’t among those calling for a stock market crash driven by high inflation, or a decade of negative real returns like we saw in the 1970s. But we do think investors are underestimating the chance that inflation remains high enough to put the brakes on the stock market’s gains, which we think will be underwhelming over the next few years.
Thomas Mathews Markets Economist
Continue reading

More from Global Markets

Global Markets Update

Fed tightening & the outlook for US corporate bonds

Our baseline forecast envisages that US corporate bond spreads rise only slightly as the Fed raises interest rates over the next couple of years. But we think the risks to this forecast are skewed to higher spreads.

21 January 2022

Global Markets Update

We think that China’s equities will continue to struggle

Even though we doubt that China’s equities will fare anywhere near as badly over the next couple of years as they did in 2021, we do not expect them to make strong gains from here either.

14 January 2022

Global Markets Update

Key financial market calls for 2022

We do not think the returns from many financial assets will be as good in 2022 as they were in 2021. For a start, we envisage a sell-off in government bonds in most places, reflecting the outlook for monetary policy. And, in general, we foresee an underwhelming performance from equities, including in the US and China. We expect this backdrop to be accompanied by a further broad-based rise in the US dollar. In view of the wider interest, this Global Markets Update is also available to clients of our Asset Allocation & FX Markets services.

13 January 2022

More from Thomas Mathews

Global Markets Update

Assessing the market reaction to Omicron so far

This Update takes stock of the moves in developed market (DM) asset markets in response to the “Omicron” variant, and provides initial thoughts on how we think things might progress if some of the fears about it are realised.

3 December 2021

Capital Daily

Inflation compensation, oil prices and the Omicron variant

News of the “Omicron” variant of the coronavirus may have hit both inflation compensation and oil prices recently, but we suspect the correlation between the two will be weaker over the next couple of years than it has been in the past.

29 November 2021

Capital Daily

Steeper NZ yield curve may be sign of things to come elsewhere

We think developed market yield curves will generally steepen in the near term, as central banks don’t deliver as many rate hikes as appear to be discounted in markets.

24 November 2021
↑ Back to top