Just a few months ago, financial markets were in the midst of one of the wildest anything-goes phases in history. Today, the mood is very different.
Despite a powerful rebound in the last days of January, the MSCI World benchmark of global stocks fell by more than 6 per cent last month, making this the worst start to a year since 2008. That is a loss of value of roughly $6tn.
US technology shares that dominated the post-financial crisis rally this week extended their fall in 2022 to almost 10 per cent, after Facebook shocked investors with poor results.
The pain has been even more profound in many of the more speculative corners of markets, and supposed safer havens have failed to provide much succour. Cryptocurrencies shed almost half their value. Even bonds — which are supposed to buttress investors against such spurts of turbulence — have lost money this year. Only nine of the 38 major asset classes tracked by Deutsche Bank ended January in positive territory.
“The intraday swings have been breathtaking and some key segments are now in a bear market,” says Jim Paulsen, chief investment strategist at The Leuthold Group, an independent investment research firm. “Who knows how long the carnage associated with this rollercoaster ride will continue and where the stock market will ultimately bottom?”
The primary cause of the market angst is obvious: After nearly two years of aggressive stimulus to soften the economic impact of the Covid-19 pandemic, many central banks have felt compelled by accelerating inflation to abruptly tighten their policies. Multi-trillion dollar bond-buying programmes are being wound down, and interest rate increases are coming. The Bank of England became the first major central bank to lift rates in December, and followed with a second increase this week. It is expected to be joined by a host of others in the coming months: even the European Central Bank on Thursday hinted it may raise rates in 2022.
The fear is that this could mark an inflection point for markets. For over a decade, investors have learned that every wobble was merely an opportunity to buy, as central banks would always act swiftly to loosen monetary policy to forestall a serious crash. “Buy the dip” became a mantra, and ultimately even a meme. But now the hands of central banks have been tied by a spurt of inflation.
The Federal Reserve last month underscored how a very different market regime may now be beckoning On January 26, chair Jay Powell, undaunted by the recent bout of volatility, indicated that the US central bank was willing to raise interest rates more aggressively than previously hinted.
“This has been a significant correction,” says Kristina Hooper, chief global market strategist at the investment group Invesco. “Markets have been forced to realise that the Fed means to curtail inflation and has pivoted…
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