The key indices of the US stock market - Dow Jones, NASDAQ, and S&P 500 - ended Wednesday with a slight drop. At the moment, we are seeing a correction against a correction. Recall that at the beginning of this year, a "bearish trend" began in the US stock market, which, from our point of view, is quite logical and expected. And according to our estimates, it will last at least a year. In other words, the US stock market has been growing for a very long time and now it is simply necessary to adjust to count on new growth later. As we said earlier, no instrument can constantly move in one direction. This applies to both long-term and short-term trends. At the moment, many central banks of the world are busy tightening monetary policy. And the tightening of monetary policy almost always leads to a fall in risky assets, which include stocks or cryptocurrencies. Therefore, we are now seeing an expected development of events. Rates are rising after two years of a pandemic, central banks are ending their quantitative stimulus programs, and some are even starting quantitative tightening programs. That is, rates are rising, and the money supply is beginning to shrink. Therefore, we continue to expect a further drop in the indices.
In the current situation, high inflation could help the indices. It's simple, the higher the inflation, the more investors are interested in instruments with higher returns to protect their capital from depreciation. However, even stocks are not able to provide high returns in a bear market. "Growth stocks" are not showing any growth now. "Dividend stocks" have a maximum yield of several percent. Therefore, now the US stock market does not have a high attractiveness to investors. Moreover, inflation risks getting stuck somewhere between the maximum possible and target levels. Judge for yourself, to lower inflation to 2%, the Fed rate may have to be raised to 5%, which the American regulator is not ready to do now. Who said that an increase to 3.5% will lead to a drop in inflation to 2%? External factors have a strong impact on price growth around the world, and they are beyond the control of central banks. The geopolitical conflict in Ukraine persists, oil and gas prices may continue to rise as more and more sanctions are imposed against Russia, and a new outbreak of the pandemic may lead to new "lockdowns" that will further disrupt supply chains anywhere. Thus, we believe that the most likely option would be to reduce inflation in the US to 4-5%, but after that, it will slow down very slowly, if at all. In the European Union, things are even more difficult, since the central bank has not even raised the rate there yet. And in the UK, four rate hikes did not affect the consumer price index in any way - it continues to grow.
