The start to the new stock market year is dominated by increasing fears of inflation. The main focus is on central bank policy in the USA. With U.S. inflation recently at 7%, the financial markets there now expect four interest rate hikes in 2022. In addition, Fed Chairman Jerome Powell spoke out in favor of a rapid reduction in the central bank balance sheet. These announcements caused strong nervousness and sell-offs in recent weeks. As a reminder, the massive expansion of liquidity by global central banks - with the Fed leading the way - has been the key factor behind the stock market rally since the Corona crash. If monetary support fails to materialize and liquidity is even withdrawn from the markets in the future, fundamental problems that have so far been concealed by ultra-expansive monetary policy may come to light. As corporate profits come under additional pressure from higher commodity costs and looming wage inflation, investors will have to prepare for a completely new scenario: Unprofitable, very highly valued and "hyped" companies are the clear losers in this environment, while companies with solid balance sheets and strong earnings prospects should benefit from a relative perspective.
Bad news for the financial markets is also coming from geopolitics. The situation on the Russian-Ukrainian border is dangerous and threatens to escalate. Russia has responded to U.S. President Biden's urgent warning against an invasion of Ukraine by announcing a full-scale naval maneuver. Observers fear that Russia is seriously considering annexing the Donbass region or even further parts of the country. Recent developments have been particularly hard on Russian financial markets and the ruble. However, the increased risk in the region is already priced into global markets. For example, the robust performance of oil and gold prices is likely to be due not only to inflationary risks but also, in part, to the Ukraine conflict.
Against this background, professional investors should act in a risk-conscious manner and not neglect the possibility of sharp market corrections.