Interest-rate hike sooner than expected?

For the month as a whole, the US S&P 500 Index fell by 5.2 per cent measured in USD, while the European Stoxx 600 Index dropped 3.8 per cent measured in EUR and the Nordic VINX Index plunged by all of 9.1 per cent measured in NOK. Here in Norway, the Oslo Stock Exchange Benchmark Index (OSEBX) declined by 2.2 per cent.

Interest rate normalisation

The US central bank (FED) has been increasingly aggressive regarding the prospects of interest-rate hikes. The quantitative easing (support) purchases are expected to end in March, and the FED has now largely confirmed that the interest rate will be increased that same month. This aggressive announcement led to market expectations jumping from three interest-rate hikes to five in 2022 alone. If the FED succeeds with its possible interest-rate hikes, it may also be relevant to reduce its balance sheet. The FED’s interest-rate hike was reflected in the stock market, where we saw an unprecedentedly sharp rotation from growth to value shares.

 Base effects in focus

The current inflation rate in the USA is high at 7%, but there are many indications that this will drop in future due to so-called base effects. These include a rise in energy and commodity prices from low levels and improvements in troubled supply chains. Although inflation normally falls due to such factors, a tight labour market and increasing wage growth may have led to this falling more slowly. Future inflation developments will be an important factor when the FED is considering restrictive measures.

Has the growth rate peaked?

The growth rate in the economy may also fall from high levels. For example, it can be seen that consumer confidence has dropped as society has reopened. One of the reasons for this may be weaker buying power due to the high inflation rate. So far, growth is expected to fall but remain above the trend growth rate. There is a risk if growth stagnates while inflation remains high. However, the risk of stagflation appears slight since lower growth would reduce the inflationary pressure.

The road ahead …

We can still see that strong company earnings are an important driver for the stock market return. There are many indications that we will see growth above the trend growth rate this year too, despite a slightly weaker growth momentum. This must naturally be balanced against the central banks’ restrictive measures, but overall a positive growth picture means shares will remain an attractive asset class.

The world is not the most pleasant place. Eventually, your parents leave you and nobody is going to go out of their way to protect you unconditionally. You need to learn to stand up for yourself and what you believe and sometimes, pardon my language, kick some ass.

Queen Elizabeth II