A big concern is valuation. Stocks in America look terrifyingly expensive
. Speaking on the 26th, Mr Powell emphasised the risks to price stability and did not dismiss the idea of a rapid series of interest-rate increases. A 0.25% rate rise at the Fed’s next meeting on March 15th-16th seems nailed-on.
In response to the change in tone, markets have priced in more rapid policy tightening. The rise in long-term real interest rates has been notably sharp. Yields on ten-year Treasury inflation-protected securities , which were around -1% at the start of the year, are now approaching -0.5%. Stockmarkets have had to adjust to this. Higher long-term rates reduce the present value of future corporate cashflows, making shares less valuable.
As investors consider the demand outlook for the coming months, there is a lot less to excite them. Profits will be squeezed by a slowing economy, and thus slowing revenue, but also by rising costs. Higher commodity prices add to the raw-material bill. A bigger headache is labour. The tight jobs market is bidding up the salaries of scarce workers. “There is real wage inflation everywhere,” lamented David Solomon, boss of Goldman Sachs, on a call to investors last week.
Might anything improve the market mood? There are some bits of good news that investors might eventually cling to. Omicron may prove to be the final wave of the pandemic; its effects may be transient. As it fades, so might the labour bottlenecks behind much of the recent inflation. There are tentative signs that China’s economy is bottoming out. The
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