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 inflation. 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 firms, 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 intensified. At one
point the nasdaqwas down by almost 5%.
Thenstockssuddenlyrallied.Thenasdaq
finishedthedayupby0.6%.OnTuesday
sharepricesfellagain.OnWednesdaythe
s&p 500 hadposteda handsomeincrease
beforeJeromePowell,theFed’schairman,
gavehispressconference.Bythetimehe
hadfinishedspeaking,it wasinthered.
Behindalltheminutetominutelurch
esisa marketthatissomewhatforward
looking.Andwhathasthemarketnowto
lookforwardto?Quitea lotoftrouble,it
wouldseem.Insixmonths’time,theeasy
moneythathassupportedstockpricesfor
solongwillbefirmlyonthewayout.The
economywillbeweaker.Corporateprofits
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. Inflation 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 inflationprotectedsecuri
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