- Daily Zen
Inflation has marked the highest since June 1982.
Several economic challenges have hit the global economy over the last decade. The high inflation rates coupled with the Covid-19 pandemic have become a major concern for investors and policymakers. This is because inflation erodes the purchasing power of savings and makes debt burdens harder to bear.
Global central banks are expected to diverge in 2022, with some addressing the threat of a high inflation rate and others encouraging economic development.
On the other hand, the pandemic poses a threat to the global economy, but after initiating a recession in 2020, it’s immediate kindling of pricing pressures has presented monetary policymakers and investors with huge challenges.
The consumer price index, which gauges the cost of dozens of products, increased by 7% in December from the previous year, the highest rate since June 1982.
Investors in the stock markets are concerned about the effect of inflation rates on profits, and the US Federal Reserve is under pressure to speed up the timeframe for starting interest rate rises.
Concerns about the fast-spreading Covid-19 Omicron variant have sparked a recent stock market sell-off, headed by Nasdaq and shares of technology and other big-growth businesses that have made huge gains due to the low-interest rates.
Huge profit growth earlier in 2021 was spurred by a recovery from the early phases of the pandemic’s economic collapse.
According to Bill Northey, senior investment director at US Bank, “we’re reaching the end of the relatively simple comparisons that we had relative to 2020.” Bank Wealth Management is a service provided by a bank. “As we get closer to 2022, those simple similarities will start to fade.”
Last year’s great stock market performance —the S&P 500 (.SPX) gained 26.9% for the year —was fueled by tremendous profit growth; therefore, Northey believes corporate outlooks for 2022 will be crucial this earnings season.
According to Refinitiv DataStream, profits growth for all of 2021 is expected to be about 50%, compared to 8.6% for 2022, and the forward price-to-earnings ratio for the S&P 500 was recently at 21.7, compared to its long-term average of 15.5.
Due to increased lending and higher inflation rates, analysts anticipate large US banks to record a rise in fourth-quarter core revenues. Last week, the S&P 500 bank index (.SPXBK) and financial index (.SPSY) reached new highs. The US Federal Reserve’s December meeting minutes were published last week, and they revealed that some officials want to tighten policy even more quickly.
Investors will be on the lookout for signs that supply chain bottlenecks are easing, as the inflation rate is one of their top concerns. Recent economic data from the United States have provided some encouragement on that front.
In last week’s data on US services industry activity, there were faint hints that the supply bottleneck in that sector is breaking up.
Snags in transportation at ports and other locations have resulted in greater prices for businesses and consumers.
Bottlenecks have particularly badly hit retailers, and investors will see how they impacted Christmas sales.
Companies in the S&P 500 have been posting record profit margins, with many passing on greater costs to consumers, but that may not be the case in the future.
“We don’t anticipate record margins this quarter,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices in New York, said.
Investors have been shifting away from technology-heavy growth equities and toward more value-oriented firms, which tend to perform better in a higher-interest-rate environment. Nonetheless, some investors believe that technology company results may be far better than Wall Street anticipates.
The first results from huge tech and other mega-cap businesses will be released next week, with Netflix reporting on January 20.
According to Daniel Morgan, portfolio manager at Synovus Trust in Atlanta, Georgia, recent earnings from certain semiconductor firms, notably Micron Technology (MU.O), were encouraging.
“That gives me hope that we’ll have positive news from the chip sector,” he added. “I’m hopeful,” he says.
According to the Department of Labor’s Bureau of Labor Statistics, the consumer price index, a gauge that tracks prices across dozens of products, grew by 7%. CPI increased by 0.5 percent on a monthly basis.
Officials at the Federal Reserve are constantly monitoring inflation statistics and are largely anticipated to hike interest rates this year to battle rising prices and as the labor market near full employment. Although the central bank’s key inflation gauge is the personal consumption expenditures price index, officials use various data and investment strategies when making decisions.