Inflation: When Central Banks Drive the S&P 500, and When Does It Start to Get More Excited? A Commentary from a Senior Analyst at Invesco
The S&P 500 didn’t reach the heights they achieved on January 3. The S&P 500 will be almost 20 percent lower on Friday than it was on the day in question, and the performance will be its worst since 2008. Cryptocurrency giants like FTX have fallen, and debt is no longer cheap.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is usually said that the yearly changes in prices of everyday goods and services include food, furniture, clothing, transportation and toys.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Is inflation affecting the stock market? Trouble for stocks usually comes from rapid inflation. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
But even as the U.S. economy heads toward a possible recession, the Federal Reserve has said its job is far from over. Inflation, while starting to cool, is still far too high, and interest rates are predicted to rise further, foretelling more pain to come.
This year inflation drove the central banks to drive the markets, and that will continue into the future, according to one of the global market strategists at Invesco. This is a very, very dramatic, history-making moment. We have all been witness to a sequence of events, starting with the pandemic, that has been extraordinary.”
The food and energy crises in poorer countries were caused by Russia’s invasion of Ukranian in late February, posing an even harder challenge for the Fed. The Fed raised interest rates in March.
Central banks use higher interest rates to fight inflation. By raising rates, borrowing costs also increase, slowing demand in the economy and in theory tempering further price increases. This has been a record year for the yield on 10-year US government bonds, with an annual rise of 2.3 percentage points. In turn, borrowing rates on mortgages, company bonds and other debt ratcheted higher.
Lower profits are another sign that higher costs mean less for companies. That proved especially true for tech companies, whose growth had been supported by low interest rates. The index that contains tech stocks has lost over 30 percent in less than two years.
As investors lost money in the stock market, and households faced ballooning costs from inflation, the air came out of other, more speculative markets as well. The share prices of so-called meme stock such as AMC Entertainment and Gamestop, whose share prices were propelled higher by a new breed of amateur investor, fell steadily throughout the year, as the price of Bitcoins, one of the most well-known cryptocurrencies, plummeted.