The Economist - USA (2022-01-29)

60 TheEconomistJanuary29th 2022
Finance & economics

Financialmarkets

Forward in fear

A

s the stock-tradingscreens  turned

red,  one  trader  was  heard  to  quip  that

at least some things are falling in price. By

the  market  close  on  Wednesday,  January

26th,  the  cumulative  loss  on  the  s&p 500

index had moved towards 10% for this year,

barely four weeks in. The year­to­date de­

cline in the nasdaqComposite, a tech­hea­

vy index, is well into the double digits. The

message  from  the  Federal  Reserve,  which

concluded its scheduled policy meeting on

the  26th,  is  that  interest  rates  must  rise

soon to tackle high inflation. It has been a

rocky start to 2022 for investors. 

The  day­to­day  numbers  for  the  broad

indices do not do full justice to the jump­

iness  of  markets.  Much  of  the  drama  has

been beneath the surface, at the stock or in­

dustry level. Technology shares in particu­

lar have fared badly. The ftse100 index of

British stocks, which is light on technology

and heavy on oil and commodity firms, has

been more resilient than American indices

(see chart 1). Prices have swung wildly dur­

ing  each  trading  day.  On  Monday,  for  in­

stance,  trading  began  in  New  York  with  a

big sell­off, which then intensified. At one

point the nasdaqwas down by almost 5%.

Thenstockssuddenlyrallied.Thenasdaq

finishedthedayupby0.6%.OnTuesday

sharepricesfellagain.OnWednesdaythe

s&p 500 hadposteda handsomeincrease

beforeJeromePowell,theFed’schairman,

gavehispressconference.Bythetimehe

hadfinishedspeaking,it wasinthered.

Behindalltheminute­to­minutelurch­

esisa marketthatissomewhatforward­

looking.Andwhathasthemarketnowto

lookforwardto?Quitea lotoftrouble,it

wouldseem.Insixmonths’time,theeasy

moneythathassupportedstockpricesfor

solongwillbefirmlyonthewayout.The

economywillbeweaker.Corporateprofits

willbefeelingthesqueezefromdecelerat­

ingrevenuegrowthandfromrisingwage

costs.Thereare,inshort,morereasonsfor

alarmthanhope.Nowondermarketsare

sojittery.

StartwiththeFed,whichisneverfar

frominvestors’thoughts.Afterspending

muchof 2021 playingdownanyimmediate

needfortightermoney,theFedchangedits

tune quite abruptly. Itsounded a more

hawkishnoteatitsmonetary­policymeet­

ing in December. The minutes of that

meeting,publishedonJanuary5th,made

cleartoinvestorsthatrateswouldsoonbe

goingup.Thereasonsforthevoltefaceare

straightforward. Inflation is uncomfort­

ablyhigh.Itcannolongerbedismissedas

transitory.Andthelabourmarketisfast

runningoutofworkers.Speakingonthe

26th,MrPowell emphasisedtherisksto

pricestabilityanddidnotdismisstheidea

ofa rapidseriesofinterest­rateincreases.

A0.25%rateriseattheFed’snextmeeting

onMarch15th­16thseemsnailed­on.

Inresponsetothechangeintone,mar­

ketshavepricedinmorerapidpolicytight­

ening.Theriseinlong­termrealinterest

rateshasbeennotablysharp.Yieldsonten­

yearTreasury inflation­protectedsecuri­

ties(tips),whichwerearound­1%atthe

start of the year, are now approaching

­0.5%.Stockmarketshavehadtoadjustto

this. Higher long­term rates reduce the

The reasons behind the current bout of stockmarketturmoil

→Alsointhissection

61 Whatwarmeansforcommodities

62 Omicronv theeconomy

63 A revivalatDeutscheBank?

64 Theriseoffinancialinfluencers

65 Freeexchange:FromQEtoQT

Losing it

Stockmarket indices, January 3rd 2022=100

Source:Bloomberg *January4th2022=100

1

105

100

95

90

85

80

December 2021 January 2022

    13 20 27 3 10 17 2426

FTSE 100*

NASDAQ

Composite

S&P 00

— Buttonwood is away