Global stock markets end the year dominated by the headlines about the omicron variant of coronavirus, but the big threat in 2022 will be inflation.
Price growth in the United States shot up to 6.8 percent, one tenth more than the 6.7 percent registered in the Spanish economy.
With prices runaway, the great engine of the stock market, corporate profits, are in serious danger. Everything is a matter of inflation ending up affecting consumption and depressing profit margins. This is what is beginning to happen.
After a steady increase from last year, the 12-month estimates for the company’s operating margins S&P 500 They have stalled since mid-October, according to data cited by Bloomberg.
This braking coincided with the beginning of a season of results. Companies sounded the alarm about rising costs from supply chain disruptions and bottlenecks.
The dangerous price-wage spiral and second-round effects
As companies see their costs rise, they will try to pass this effect on to prices, which will put even more pressure on inflation.
In the labor market, the rise in prices will translate into increases in nominal wages, given the loss of purchasing power caused by inflation, with which there will still be more upward pressure on prices.
They are known as second round effects, which in many cases are accelerated by the salary review clauses linked to the CPI. It is the fuse that can ignite the dreaded inflationary spiral of prices and wages.
This whole process will begin to pick up cruising speed as soon as inflation affects consumption and demand.
In the opinion of Gina Martin Adams, an economist at Bloomberg Intelligence, persistent inflation will erode demand, because it is not clear that consumers are willing to continue paying higher prices.
“Consumers are starting to get tired of price increases and we are seeing this show up in margins,” he said. Martin Adams. The stagnation of purchases of goods and services in the United States in November proves that this is already happening.
Effects on markets
In the year that is ending, stocks have set new records in the United States, while in Europe, the Eurostoxx50 ended up with increases of over 21 percent.
The good performance of corporate earnings and the more restrictive turn to the monetary policies of the Fed, helped to immunize the market against inflation. By 2022, analysts expect profits to grow on Wall Street by around 9 percent.
But the US stock is trading at a PER of 22 times, close to the upper end of its all-time range, so the chances of correction are significantly increased by how demanding valuations are.
Furthermore, reaching 9 percent will not be easy, especially since omicron’s effects on supply chains are not yet clear.
Therefore, if the inflection point in demand occurs that some experts are predicting as a result of high inflation, the markets could suffer more than necessary.
If inflation remains strong, consumer confidence will start to wane, “he said. Matt Maley, Chief Markets Strategist at Miller Tabak. At some point, higher prices will hurt corporate profits, he added.
Inflation, the biggest risk on the horizon
In this context, “inflation remains the greatest investment risk on the horizon,” he said. Silvia Dall’Angelo, Senior Economist at Federated Hermes.
Left unchecked, “inflation can be the closest thing to a fire and have a devastating effect on economies, markets and portfolios that are not adequately prepared,” added this expert.
According to the projection of these experts, inflation is not expected to begin to subside at least until the first half of 2022.
In this environment, the stock markets could be more affected if the policy response of central banks is not up to the challenges posed by inflation.
A well-known effect of the uncertainty posed by rising prices is its ability to alter investment decisions.
In inflationary periods, there is usually a shift from classic financial assets, such as stocks or mutual funds, to physical assets such as real estate, land, or precious metals.