TheEconomistJanuary29th 2022 Finance&economics 61present value of future corporate cash
flows, making shares less valuable. The ef
fect is especially marked for the shares of
tech companies, which are priced for profit
growth long into the future. Hence the vio
lence of the nasdaq’s decline.
The Fed is not the only concern. Much
of the runup in markets last year was
predicated on a stronger economy and
handsome revenues and profits. Extraordi
nary growth in America was fuelled by low
interest rates, pentup demand and a
bumper $1.9trn fiscalstimulus package.
These impulses are fading. On January 25th
theimf cut its forecast for gdpgrowth in
America by 1.2 percentage points, to 4%,
for 2022, as part of its generally more som
bre outlook on the world economy. There
are already hints that a sharper slowdown
could be under way. Activity in America’s
service industries has fallen to an 18
month low, according to the latest survey
of purchasing managers. Retail sales
slumped in December. Consumer confi
dence is low. Some of this can be put down
to Omicron. But the fear is that it also re
flects an ebbing in underlying demand.
As investors consider the demand out
look for the coming months, there is a lot
less to excite them. Profits will be squeezed
by a slowing economy, and thus slowing
revenue, but also by rising costs. Higher
commodity prices add to the rawmaterial
bill. A bigger headache is labour. The tight
jobs market is bidding up the salaries of
scarce workers. “There is real wage infla
tion everywhere,” lamented David Solo
mon, boss of Goldman Sachs, on a call to
investors last week. His bank had just re
ported a blowout year for profits, but the
nerves of investors were jangled by the
onethird increase in Goldman’s wage bill
last year. Other businesses that also rely
more on brainpower than physical capital
will feel the pinch—another reason why
tech shares, especially those of fledgling
firms, have come under selling pressure.
A third concern is valuation. Stocks in
America look terrifyingly expensive. A
measure popularised by Robert Shiller of
YaleUniversityputsAmerica’sstockprices
ata steep 36 timestheirearnings,adjusted
forthebusinesscycle.Thatisabovethe
readingbeforethe1929 crash(thoughstill
lowerthanthevaluationreachedduring
thedotcomboomofthelate1990s).A reck
oninghadlongseemeddue,especiallyfor
expensivelooking,unprovenbusinesses.
arkInnovation,anexchangetradedfund
thatinvestsinyoungtechfirms,hasbe
comeshorthandforthemorespeculative
endofthemarket.Itisdownbymorethan
50% fromits peak.There is scepticism
aboutfamiliarnames,suchasNetflixand
Zoom, whichdid wellfromthestayat
homeeconomy,buthavesufferedrecently.
Investorsaretakingrefugeinhithertoun
loved oil stocks, which offerprotection
againstinflation,suchasExxonMobil(see
chart2).“Inshort”,notesMichaelWilson
ofMorganStanley, abank,“thefroth is
comingoutofanequitymarketthatsim
plygottooextendedonvaluation.”
Might anything improve the market
mood?Therearesomebitsofgoodnews
thatinvestorsmighteventuallyclingto.
Omicronmayprovetobethefinalwaveof
thepandemic;itseffectsmaybetransient.Asit fades,somightthelabourbottlenecks
behindmuchoftherecentinflation.There
aretentativesignsthatChina’seconomyis
bottomingout.Theeu’s “NextGeneration”
fund,whichwilldisburse€750bn($880bn)
tomemberstates,stillhasalotoffiscal
fuelinthetank.Alotofthebetternews
comesfromoutsideAmerica,though.It
maynotdomuchforthenasdaq. Anditis
hardtofeelbullishaboutEuropewithRus
siantroopsamassedonUkraine’sborder
(seenextstory).
Investors nursing hefty losses might
havehopedfora lesshawkishtonefrom
MrPowell.Insteadhesoundedfarmore
worriedaboutrisingconsumerpricesthan
fallingshareprices.A volatilestockmarket
should notbe offirstorder concern to
policymakers.Amarketcorrectionmight
evensuittheFed’spurposes,if it bringsthe
people who have retired early on their
sharepricegainsbackintowork.TheFed
wouldhavemorereasontoworryshould
thecorporatebondmarketbecomebadly
unstuck,becauseit isvitalforfunding.But
sofarcorporatebondspreadshavebeen
stable.It isstockpricesthatarejumpy.And
it ishardtoseethatchangingsoon. nNetflix and drill
Share prices, $Source:Bloomberg600500400300January 20224 10 1 2426Netflix
75706560January 20224 10 1 2426ExxonMobilCommoditiesMaterialmoves
“I
f russian tanks cross the border,
markets will freak out.” That is the
considered judgment of Helima Croft,
headofcommoditystrategyatrbcCapital
Markets,aninvestmentbank,anda former
analyst atAmerica’sCentralIntelligence
Agency.WereRussiatoinvadeUkraine,the
biggestimpactwouldfirstbefeltonEuro
peangasmarkets.ButMsCroftisnotalone
inthinkingthattheshockwaveswouldspreadfarmorewidely.
Thepotentialfordisruptionstemsfrom
Russia’shugeimportanceforcommodity
markets(seechart1).Itistheworld’sbig
gestexporterofnaturalgas,andthesec
ondlargest exporter of oil. It supplies
nearlyatenthoftheworld’saluminium
andcopper,andproducesa rangeofother
metals,including43%oftheworld’spalla
dium,a componentofcatalyticconverters.
Itisalsothelargestexporterofwheat.
Theworstcasescenarioisthattheflow
ofthesevitalrawmaterialsiscutoffasten
sionsescalate.Thatcouldhappenbecause
Russian exports,orthepayments infra
structureneededtofacilitatethem,arehit
byWesternsanctions.Alternatively,Rus
siacould itself decide to halt someex
ports—notablyof gas—in anattempt to
cowitsopponents(seeEuropesection).
Themerefearofdisruptionshassent
priceshigher.OnJanuary26thBrentcrude
oilapproached$90a barrel,a sevenyear
high;theEuropeanbenchmarkfornatural
gasstoodatabout€90($101)permegawatt
hour,comparedwith€70atthestartofthe
year(seechart2 onnextpage).Thecopper
priceisflirtingwithitsmultiyearpeak.N EWYORK
TradersarebracingforwarinUkraine.Justhowbadcouldthingsget?Market muscle
Russia’s exports, share of world total, %
2020Sources:BP Statistical Review; FAO;
WorldBureau of Metal Statistics1CopperAluminiumCrude oilWheatNatural gas20151050