Investors brace for test of nerves as inflation fears escalate


For too long, over a year, money management has been relatively straightforward, with increasing inventory. It instills an anxious feeling that something must go wrong and puts pressure on some of the foamy parts of the stock market.

Earlier this month, Janet Yellen was responsible for brushing off some of that foam. At an event hosted by Atlantic magazine, the former chairman of the Federal Reserve, now Secretary of the US Treasury, pronounced scary words in the hearts of some market participants: “Interest rates may need to rise somewhat to keep our economy from overheating.”

It is almost comical that this is causing a reaction from the market. The Fed cut rates to zero and activated the stimulus pipe due to the coronavirus crisis last year. Fortunately today, vaccination rates in the United States are high and infection rates are declining. Business is quickly resuming its normal course. Fast enough, in fact, to cause bottlenecks and supply issues in everything from lumber to labor.

It doesn’t take a rocket scientist to see how this might play out. Making predictions is foolish, but I’m ready to shut up here: the next one the evolution of US interest rates will be higher, not lower.

And yet: bring out the fragrant salts. After Yellen’s comments, some of the tech stocks that have shone over the past 12 months have faded, and the Nasdaq Composite ended the day down nearly 2%. Yellen herself quickly clarified her remarks. It was not “predicting or recommending” a price increase, which is no longer its responsibility anyway.

Some analysts have described the Treasury Secretary’s comments as a volatility fueling faux pas. Cooler heads saw it as a statement of the obvious. The market reaction only underscores how skinny some investors have become and how careful monetary and fiscal policymakers need to choose their words.

“The markets seem determined to live in the past,” wrote Paul Donovan, chief economist at UBS Wealth Management. “Consumer price inflation in every economy tells us about the price of oil a year ago. It’s not a problem, but the markets want to worry about something. “

Market movements this week again suggest that the urge to worry is strong. High-growth tech stocks on Tuesday fall in anticipation that Wednesday’s US inflation reading would be high. Wednesday they fell again whereas inflation has indeed turned out to be very hot.

The latest assessment of consumer prices in the United States showed 4.2% climb in April compared to a year ago – biggest reading since September 2008. Some details were even more striking; Prices for used cars and trucks jumped 10% in April alone, a large part of the overall index gains.

Again, none of this should come as a huge surprise.

“Looks like Wall Street is climbing the wall of worry,” said Gregory Perdon, co-chief investment officer at private bank Arbuthnot Latham. “Bears are constantly looking for signs of the end of the world. They find all the potential excuses. The reality is that the only question that matters is whether the reopening is going well or not. And it’s going well. And Europe brings it together. “

The reasonable assumption still runs that the Fed likes to provide unexpected stimulus. He doesn’t like to shock the system with unforeseen tightening measures that strain financial conditions. So, while the central bank is committed to maintaining an extremely accommodating policy even in the event of inflation above target, some rate regulators have started to mentally prepare the market for a possible return to normal. The last few days and weeks show that investors are going to have to learn to live with this.

The volatility is centered on high tech stocks, which seem to be the right place. It’s bad news if you are, for example, Ark’s Cathie Wood. Its flagship innovation fund for monitoring technological actions has fall by more than a third from its peak in February.

Equities closely linked to bitcoin and newly listed U.S. companies are also suffering from a rough patch. This is all a catch-up from the shock in the first quarter bond market. Fixed-income scholars, an austere bunch at best, priced during a pick-up in inflation earlier in the year. Notably, while US 10-year yields rose on Wednesday after the inflation data was released, they did not hit new highs.

Investors in companies that are not yet making a profit are on shaky ground after a spectacular run. For everyone else, aside from those who really believe that the inflation pickup is going to get out of hand, now is the time to prepare for frequent nerve tests.

katie.martin@ft.com



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