Is inflation lurking around the corner?
The Democratic Party's new majority stole the headlines in January and gives President Joe Biden more room to manoeuvre. The prospects of a steadily more expansive fiscal policy bring with them expectations of inflation.
In the month as a whole, the American S&P 500 Index fell by 1.0 per cent measured in USD, while the European Stoxx 600 Index declined by 0.7 per cent measured in EUR and the Nordic VINX Index remained unchanged measured in NOK. Here in Norway, the Oslo Stock Exchange Benchmark Index (OSEBX) dropped by 0.7 per cent.
Among the news that received the most attention in January was the result of the re-election in the US state of Georgia. By winning both the two mandates, the Democrats secured a majority in the Senate, and this is predicted to have major economic consequences. The Biden administration is expected to introduce a steadily more expansive fiscal policy. Increased investments may be positive for the market, but may also make inflation more likely.
Support from the authorities
In the short term, there is greater expectation of inflation, largely due to increasing commodity prices. Combined with the expansive fiscal policy, this has led to some people starting to wonder whether the monetary policy should be tightened. However, the US central bank (Federal Reserve) has recently adopted so-called average inflation targeting, and may be inclined to let inflation run as usual for a period. It therefore appears likely that the central bank will focus on high unemployment and low wage growth, and continue to support the economy with its expansive policy in future too.
The markets became increasingly volatile towards the end of the month, apparently due to hedge funds having to sell investments to cover short-sale losses. At the same time, the vaccine rollout is facing challenges due to fresh outbreaks, mutations and complicated logistics. The vaccination programmes also vary significantly from region to region – while they are going slowly in the eurozone, the US, Israel and UK have come the furthest. In total, however, the prospects of recovery remain intact.
The road ahead …
Continued economic recovery, combined with stimulus packages from the authorities, means the outlook for shares is positive. In light of the companies' increasing earnings growth, shares appear to be a good investment alternative.
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