Investors are now moving to top up their portfolios with stocks as inflation expectations cool for the rest of 2022.
My observation comes as central banks around the world, including the Bank of England, the U.S. Federal Reserve, and the European Central Bank, amongst others, take tough decisions on interest rates to tame soaring prices.
In many developed countries, headline inflation rose by the end of 2021 to its highest level in between two and four decades.
Central banks have been behind the curve on inflation and have largely failed to keep prices under control. This is why many are now currently playing catch-up with the tightening of monetary policies.
Such is the panic of persistent inflation and the measures needed to deal with it, some analysts have recently been saying they expect the likes of the Fed – the world’s most influential central bank – to raise rates five times this year.
This has had the effect of hitting some stock prices, especially in the tech sector. The tech-heavy Nasdaq index suffered its worst month in January since the pandemic first jolted markets in March 2020.
Shares in Meta, the owner of Facebook, plummeted more than 20% in after-hours trading on Wednesday. Elsewhere, PayPal, which missed expectations, dropped almost 25% the following day, and Spotify shed up to 23% in after-hours trading before regaining some ground to trade around 10% lower.
However, it’s our experience that many investors now believe that we could hit peak inflation by the end of this quarter, as global supply chains, which have been largely responsible for price hikes, begin to return to some sort of post-pandemic normality.
In turn, this would mean that interest rates will not have to be hiked as much or as often as some commentators have suggested. This would be bullish for stock markets.
As such, investors are now moving to top up their portfolios with high quality stocks that have been hit by the talk of aggressive rate hikes throughout the rest of the year.
They are seeing the current dip as a discount and using it as an opportunity to build their long-term wealth.
Following last month’s Federal Reserve meeting at which the Chair Jerome Powell all but confirmed an interest rate increase would be implemented in March.
I would urge the Fed not to fail on inflation again by hitting the brakes with too many rate hikes.
The excess money in the system will come out fast. There’s a real risk that numerous interest rate hikes would cause a recession and may not even slow inflation as the soaring prices are triggered by supply chain issues which the Fed’s hikes will not solve.
For the remainder of this quarter, bullish investors will be betting on inflation peaking, resulting in shallow rate hikes for the rest of the year.
Nigel Green is the CEO of the deVere Group
BUSINESS REPORT