There’s a regime change underway that could have big implications for the market and one expert says investors aren’t taking it seriously enough. Here’s what you need to know now.
Inflation is ticking higher.
The Labor Department on Wednesday said that the consumer price index—a measure of inflation—ticked up 0.4% in February, while U.S. Treasury yields have spiked in anticipation of accelerating economic growth and with it, inflation.
And Moody’s Analytics Mark Zandi says investors are seriously underestimating the seriousness of a rise in inflation, and warns it would likely affect every corner of the market.
“Inflationary pressures will develop very quickly,” Zandi said, adding that such an environment is “dead ahead.”
“We’ve got the pandemic winding down, a boatload of fiscal support coming and we’ve got a lot of folks who have pent up demand and a lot of savings that they’re going to unleash,” Zandi said, adding that “growth is going to be very, very strong – lots of jobs, falling unemployment [and] wage growth.”
But with all that good, Zandi warns that investors will have to prepare for wild market swings where not even economic reopening stocks will be safe.
“These are broad, macroeconomic forces that are going to affect all parts of the market equally,” Zandi added. “I don’t think there’s any shelter here.”
The Moody’s chief economist sees higher inflation data this spring, followed by one to three years of volatility as interest rates climb.
“We’ll get some big numbers here in the next couple of months,” Zandi said. “I think we’ll go back below 2% for a bit then we’ll reaccelerate. My sense is we’ll be consistently above 2% by the end of the year going into next. Then by the end of 2022, inflation will be consistently above the Fed’s target. By early 2023, I think they will be raising short term interest rates.”
Once the U.S. gets back to full employment, Zandi says inflation will move northward to 2.5% to 3%, which could catch investors off-guard.
“We’ll then have to work to get inflation back to 2%,” he added. “That’s a problem [Fed officials] want. I don’t think investors have brought into how high inflation will be… For 20, 25 years, we’ve barely gotten to 2%. …For investors who are more near-term focused, I think it’s just going to be a very difficult market to naviaged in, and I don’t know that there’s one part of the market that is going to do meaningfully better than the other.”