US inflation rose to 8.6% in May 2022. This doesn’t just mean a hot economy, but a historical high in 40 years. Consumers have had to grapple with rising costs of basic commodities such as energy and food while companies are experiencing high production costs. The labor market is tightening with firms struggling to fill open positions and workers demanding higher wages.
The story is not any different in Europe. Germany, the largest economy in Europe, recorded 7.9% inflation in May, a level not seen since the reunification in 1990. In France, the consumer price index rose by 0.4% month on month to hit 5.2% in May. This is the highest since September 1985.
Market averages across the US and Europe such as the S&P 500, Nasdaq, Dow, FTSE 100, CAC 40, have plunged massively year to date (YTD). For instance, the S&P 500 is more than 20% off its Jan 2022 high, taking it straight into a bear territory. The ger30 price as of this writing is at 13,143.73, representing an 18% drop YTD.
How is the Global Market Now?
As reflected by the performance of the indices, the global financial market is reeling from the effects of inflation and the likelihood of a recession down the road. Asset prices from various classes including stocks, bonds, derivatives, and commodities are experiencing volatility. For instance, tech stocks including the famous FAANG (Facebook now called Meta, Amazon, Apple, Netflix, and Google) are seeing their prices slashed. Investors, both retail and institutional, are abandoning risky assets in favor of safe havens.
Diving deeper into the performance of individual components in indices such as GER 30, shows mixed fortunes. Constituents such as Heidelbergcement AG O.N. (HEIG) are leading the onslaught in the red territory with top analysts lowering their price target on the stock. Emerging markets such as Asia, are also feeing the effects of a heating global market.
What Is Inflation and Recession?
Inflation refers to the general rise in prices of goods and services in an economy as measured by the consumer price index (CPI). Consequently, such a rise leads to a decrease in the purchasing power of money making a dollar today worth less than it was earlier. Food, shelter, and energy are some of the key inflation drivers.
When inflation persists and becomes unacceptably high, central banks are forced to intervene by tightening their monetary policies. They achieve this by raising interest rates to cool off demand pressure, hence lowering prices. However, this is a balancing act that has the unfortunate possibility of driving economies into recession.
A recession refers to an economic cycle characterized by high unemployment, low inflation, and a decline in economic growth. A survey of 750 CEOs and other executives conducted by the Conference Board revealed that over 60% of them believe that in the next 12 to 18 months, the economy in the primary areas where their companies operate will enter a recession.
How Does Inflation and Recession Affect Stock Prices?
An inflationary environment is not good for the stock market. While high inflation can stimulate job growth, it also pushes up input costs, effectively squeezing corporate earnings. Since stocks are priced based on the prospect of future cashflows, the uncertainty in earnings brought by inflation, causes market volatility and a fall in stock prices.
The prospect of a recession also dampens the stock market. Investors tend to sell-off risky assets such as growth socks and put their money is stable value stocks, bonds, and commodities such as gold.
What Is the Best Way to Survive from Inflation and Recession?
Unlike hedge funds that have a wide collection of strategies to manage choppy markets, individual investors must re-allocate their assets cautiously to avoid a wipe out. For instance, investors can diversify their portfolios to include treasuries, commodities such as precious metals, and non-cyclicals like healthcare and utilities.
Putting money in inflation-indexed instruments can also help investors weather recessionary storms. These instruments adjust for inflation to ensure the investor preserves their portfolio.
Why Is Naga a Safe Place for Your Investment in This Trying Time?
While inflation and recession are global phenomena, their impacts are felt differently in different markets around the world. For instance, emerging markets may process a recession differently from developed markets. Trading with NAGA gives you exposure to global markets from the US to Europe to Asia, thus expanding your field of possibilities in portfolio rebalancing.
Also, NAGA gives you a multi-asset trading platform comprising assets such as crypto, forex, stock CFDs, commodities, indices, futures, and exchange-traded funds. These assets have varying degrees of sensitivity to inflation and recession thus helping you preserve and grow your capital.
With central banks including the Fed walking a tightrope, there are increasing possibilities and concerns that the global economy could tip into a recession. This could mean depressed asset prices and a significant slowdown in demand and output. As an investor, you must play your cards well by looking at multi asset allocation opportunities to rebalance your portfolio. Trading platforms such as NAGA Trader, can help you find stable assets that shield you from the value-eroding power of inflation and recessions.