The Stock Market May Become a Meat-Grinder of Forlorn Hope

Recent market action has been dominated by central bank policy. Investors seek to gauge the severity of toughening up on the part of policymakers. During the pandemic, central banks embraced unprecedentedly loose monetary policies to prop up the economy. They now must undo this stimulus and focus on restoring order to the economy. Regardless of what happens next, inflation concerns will continue to dominate investors’ thinking.

Inflation (i.e. value rises) will quickly meaningfully recede

The Fed has tried to control inflation by using unconventional policy measures like devaluing currencies, which have boosted the stock market in recent years. In addition, the Fed has maintained low long-term interest rates to encourage spending. However, the Fed’s methods have not accurately predicted inflation, and the resulting rise in long-term interest rates have been far less than expected. As a result, inflation may surprise bond investors or the bond market.

Inflationary pressures have also become more acute in the U.S. in recent months, largely driven by higher prices for consumer goods. Although supply and demand imbalances have declined from high levels during the last recession, the COVID effect has heightened inflation. Once the pandemic recedes, the imbalances will begin to recede. As a result, higher prices will soon meaningfully recede in stock market.

Inflation (i.e. price rises) will continue to rise

Inflation has become a serious issue in recent years, weighing on investors’ minds and driving bond yields higher. Inflationary pressures are largely driven by the aftermath of the pandemic and monetary policy, which is to keep interest rates low. On the other hand, inflation is a good thing for borrowers, as it lowers the real cost of borrowing. Consequently, it’s a good idea to hold fixed-interest-rate loans, since higher inflation decreases the real cost of borrowing. However, to keep a prudent investment strategy, you should evaluate each stock’s fundamentals carefully.

When determining investment strategies, remember that rising inflation can lead to volatility. The Federal Reserve has argued that the current environment calls for a drastic shift in policy. This increase in costs is due to a growing imbalance in supply and demand across the economy. Inflation has affected the price of commodities, lumber, airline tickets, lodging, energy, cars, and other goods. In addition, people have spent more on specific goods, which drives inflation.

Inflation concerns will continue to dominate investors’ thinking

The Fed continues to cite the disruption of supply chains as the driving force behind price increases. But the Fed does not seem to be backing down, and inflation concerns continue to dominate investors’ thinking. Using a variety of measures, including price indexes and government reports, inflation is starting to look high. And it will likely continue to do so in the future, despite the Fed’s claims.

Some wealthy people will likely refer to the still-growing economy as a recession, but that’s based on history. Inflation can be hot while corporate profits are growing. So a potential action by the Fed is not imminent but will keep investors focused. However, action is expected but will be slow. And while stocks have plenty of time to recover from the recent setbacks, investors will remain concerned about the possibility of higher inflation.

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