After the enormous price increases, the stock market lights are yellow red. And this is not because, statistically speaking, the stock market months are now tending to be rather weak. Corporate earnings momentum is flattening out, the Corona Rally is over. The excessive, sometimes hectic measures to accelerate the economy are showing their dark side. Some supply chains have been permanently disrupted, many jobs have remained unfilled and numerous raw materials have become scarce due to a failure to invest in expansion. The resulting price or inflation effect is obvious.
While institutional investors have increased their cash quotas, young and inexperienced investors are driving up the prices of bankrupt candidates to sometimes absurd valuations, and private investors are firing up the stock markets with inflows of around US$800 billion by means of index funds (ETFs), without differentiating whether the companies contained in the indices are good or bad. Naïve passive capital is thus financing the exit of active money.
In addition, the interest rate turnaround in the USA has de facto been initiated. Against the backdrop of the latest inflation data, the U.S. Federal Reserve has unmistakably indicated the turnaround in monetary policy. Rising bond yields and a steeper yield curve are only a matter of time. In addition- almost unnoticed by the general public – the fiscal policy turnaround. Where inflation meets gigantic mountains of debt with the risk of significantly higher interest costs, either spending must be cut or revenues must be increased, otherwise the interest costs can no longer be borne. However, measures for digitization, stronger climate protection and improvement of infrastructure do not come for free. That is why tax increases on incomes and companies are being tackled first and foremost, as was recently the case in England and the USA, i.e., in countries that are traditionally proponents of tax cuts.
As good as this may be in economic and fiscal terms, the braking effect on bond and stock markets cannot be ignored. Tax increases have a direct impact on corporate profits and slow down profit momentum. The parallel rise in energy costs immediately reduces disposable income and profits for those companies that cannot pass these costs on to consumers. Rising energy prices could be followed by rising wages and thus wage-price spirals. This is a dramatic effect, but one that is difficult to assess as of today.
As a result, the capital markets are realigning themselves. Pricing in inflation rates of up to 5% at the long end of interest rates and re-evaluating the stock markets, in which only certain segments promise profits that can benefit from the described distortions and positively surprise investors’ growth forecasts with their figures.