Mixed Markets

Following the interest-rate cuts and hectic central-bank bond-buying of early 2020, investors came to believe that central-bank stimulus would pretty much last for ever. However, as investors come to terms with an end to the era of free money, financial markets have been in spasms. Markets now expect interest rates to increase four times in 2022 as the Fed fights inflation [Bloomberg], confirming an end to its bond-buying programme and signalling probable rate rises .

Having enjoyed an exceptional high of nearly 40 times earnings at the turn of the year, the S&P 500 fell by 9% in January (markets in Europe and Asia have fallen too, though by less). Markets’ intraday volatility has been just as striking, reflecting investors’ struggle to digest the consequences of tighter money. The effect of higher rates on the real economy is slower-burning and harder to anticipate .

Uncertainty about the global economy’s strength and its ability to withstand higher rates, combined with central banks’ concerns over inflation, suggests that markets are entering a new phase [The Economist]. During much of the pandemic, cheap money drove asset prices to astonishing highs even as the world economy was in the dumps. They are now tightly bound to its fate.