US inflation brings no respite for markets

As US inflation hit a 40-year high, the benchmark S&P 500 stockmarket index slid into a bear market, down more than 20% since its 3 January high.

“The bigger the party, the worse the hangover,” says Russ Mould of AJ Bell. America’s S&P 500 plunged on Monday to close down more than 20% since its 3 January high, meaning that the benchmark index is officially in a bear market. That marks the end to the bull market that began in March 2020. While it was “the shortest bull run on record since 1950… what it lacked in duration it made up in intensity”.

The sell-off followed data last week showing that US consumer price inflation hit an annual rate of 8.6% in May, the highest level since 1981, dashing hopes that it had peaked. The unexpectedly high figure increases the odds of sharp interest rate rises. Traders are now betting that the US rates will be at 3.6% by the end of 2022, up from expectations of 2.9% last week.

Tech stocks have been hit especially hard, with the tech-heavy Nasdaq down 28% since the start of the year. Yet the bear market is broadening to include sectors that had been safe havens so far this year, says The Wall Street Journal. The S&P 500’s energy segment plunged 5.6% on Monday, “a deeper decline than that of the broad index”. On the same day, ten-year US treasury bonds registered their worst one-day performance since March 2020, as yields hit their highest level since 2011.

Structural inflation

The US inflation data was “awful” and got “worse the more you looked”, says John Authers on Bloomberg. Energy prices soared 34.6%, their biggest annual increase since 2005, while food costs were up 10.1%. Policymakers might be able to do little to control soaring commodity prices, but rising rents and house prices have also sent US shelter inflation to its highest level in three decades. “Plainly, tighter monetary policy should help rein in an overheating housing market”.

For central bankers, “easing the inflationary economy onto the runway safely and comfortably is all that matters” now, says Tom Stevenson in The Daily Telegraph. Such a “soft landing” would require “just enough demand destruction and a resumption of sufficient supplies of key inputs like energy” to tame inflation. In a “hard landing”, by contrast, “central banks go too hard, too fast and push the economy into recession, either by accident or deliberately”. A “third possibility is a continuation of the current stagflation environment in which central banks remain behind the curve”, a scenario that would amount to “a re-run of the ugly 1970s economic backdrop”.

There are good reasons to fear that high inflation is here to stay, say Marco Pirondini and Alec Murray of Amundi Asset Management. There are structural labour shortages in the US and China, not to mention the inflationary impulse from higher global spending on defence and energy security. In such an environment investors will begin to “reward companies based on their current fundamentals rather than on earnings potential in the distant future”. In the first four and a half months of this year, the least expensive quintile of S&P 500 stocks returned 6%, while the most expensive fell 23% as investors “shift from paying any price to paying the right price”.

SEE ALSO:

What to buy as the tech-stock bull market crashes

Protecting your wealth from inflation won’t be easy – here’s what to do

We’re in a bear market – change the way you invest

Recommended

Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

The Energy Price Guarantee will now be extended, but how much will your gas and electricity cost you in 2023?
9 Dec 2022
What is an annuity?
Glossary

What is an annuity?

Annuities are growing in popularity as rates increase. But what is an annuity, and how do you get one?
9 Dec 2022
Profit from patience
Advertisement Feature

Profit from patience

Smart investors will reap the rewards by staying focused on the long-term, research from Alliance Trust shows.
9 Dec 2022
National Grid gets ready to pay households to cut energy use this weekend
Personal finance

National Grid gets ready to pay households to cut energy use this weekend

The cold weather and unfavourable wind conditions have raised concerns about electricity supplies, prompting the National Grid to consider paying hous…
9 Dec 2022

Most Popular

Is it cheaper to leave the heating on low all day?
Personal finance

Is it cheaper to leave the heating on low all day?

The weather is getting colder and energy bills are rising, but is it really cheaper to leave the heating on low all day or should you only turn it on …
1 Dec 2022
Radiator vs electric heater – which is cheaper?
Personal finance

Radiator vs electric heater – which is cheaper?

We compare the costs, pros and cons of radiators and electric heaters and see which one will help keep your energy bill as low as possible.
28 Nov 2022
The pros and cons of smart meters – should you switch?
Personal finance

The pros and cons of smart meters – should you switch?

A smart meter can help you keep tabs on your energy usage, but is it better than a regular meter? We take a look at smart meters vs regular meters.
2 Dec 2022