On the Global Economy and Market Volatility

Last week, the U.S. Federal Reserve shared the following comments on the global economy, as it increased its benchmark interest rate by 0.75% (the largest increase since 1994): 

• “U.S. inflation remained well above the longer-run objective of 2 percent, with some inflation measures rising to their highest levels in more than 40 years …

• “Supply chain bottlenecks remain a major impediment for domestic and foreign firms …risks to global supply chains abound.

• “In China, COVID-19 lockdowns drove the largest monthly declines in industrial production there since early 2020.

• “The invasion of Ukraine by Russia is causing economic hardship. For instance, the conflict has disrupted global commodity markets in which Ukraine and Russia account for significant shares of global exports. Notably, energy prices have soared, as increasing geopolitical tensions have put the supply of Russian oil and gas to Europe at risk.

• “Blocked shipping routes in the Black Sea have severed the region’s agricultural exports, disrupting global food markets …  prices of corn, wheat, sunflower oil, and fertilizer have climbed to record-high levels, raising concerns of food insecurity across the globe.”

Separately, during the week, prices of equities, commodities, and other assets had significant swings.

• Factors driving these moves included: 1) changing stimulus policies by central banks, 2) the Russia / Ukraine conflict, 3) inflation trends, 4) slowing economic growth, and more.

• The following chart presents the S&P 500 stock volatility index (VIX) since January 2000. On Friday, the VIX closed at 31 (the high for the week was 35; the historical average for the period is 21.1.)

OUR TAKE

• As central banks, including the Federal Reserve, increase interest rates to tame inflation, businesses and consumers will confront 1) higher borrowing costs, 2) contracting demand for products and services and 3) a likely recession.

• Recent equity volatility, while heightened, was not at an unusual level. Uncertainty will drive continued volatility, and markets will likely remain under pressure until central bankers are satisfied that inflation is under control. 

• As investors assess 1) recent losses, 2) inflation dynamics and 3) the potential of a recession – the recent market turbulence presents new investment opportunities to consider as well. Maintaining a disciplined approach remains an important part of the investment process.