Stock markets, globally, are highly correlated. The mother market, US, sets the trend and others follow. US market has turned weak: Nasdaq is down 30 percent from the peak and S&P 500 around 19 percent. The near-term dominant mood is bearish but the volatility is so high and, therefore, the market is swinging between risk-off and risk-on modes. In the near term, the market is facing too many headwinds.
Inflation has emerged as a major threat to economic growth and markets, globally. In the US, inflation touched 8.3 percent in April, in the Euro Zone inflation is at 7.5 percent and in the UK at 9 percent. In India, CPI and WPI inflation prints have come in at 7.79 percent and 15.08 percent, respectively for April and are likely to persist at high levels for a few months more. This has negative implications for the economy in the short run.
A combination of factors has contributed to the rising inflation. Humungous liquidity created by the leading central banks of the world, particularly the Fed, supply chain disruptions caused by the widespread lockdowns in China and the spike in energy and commodity prices triggered by the Ukraine war have combined to produce high levels of inflation, globally. Central banks are tightening monetary policy; those who have not yet started tightening are expected to do so shortly.
The main question is what are the implications of high inflation and monetary tightening for stock markets? How should investors respond to this situation?
First published in Economic Times