During extended bull markets it becomes easy to believe the path of least resistance is up, and harder to see the risks that could whipsaw stocks. Take January 2020, when investors remained confident even as stock valuations were already being viewed as stretched. That was right before reports about a virus in China began to surface. This month, the path of least resistance again seemed up, until Reddit and Robinhood and GameStop (NYSE:GME) gave the market its latest example of a black swan reminder that there is always something out there you won’t see coming.
Predictably, investors panicked. Sophisticated Wall Street trading instruments a world away from the investing masses and risk of hedge fund failures rippling through the market are flash points for past crashes, from Long-Term Capital Management to the subprime mortgage crisis.
There will always be new market risks. Others, though, should be easier to spot coming. Inflation, for example, which is a classic market bogeyman.
As GameStop makes investors fear that there is a new normal in the market with unknown consequences, is inflation a classic market bogeyman that no longer has the power it once had? It would have been easy to miss Federal Reserve chair Jerome Powell this past week on inflation, but he was talking it up — and at the same time, sort of talking it down.
"Frankly we welcome slightly higher, somewhat higher inflation. The kind of troubling inflation people like me grew up with seems unlikely in the domestic and global context we’ve been in for some time," Powell said after the Fed’s most recent Federal Open Market Committee meeting.
Though inflation remains low, investors worry that the Fed could start to taper its market purchases unexpectedly should conditions change and that could cause another period of market tumult. Even if the GameStop shock goes away, will there be a more classic factor for investors to worry about?
Powell pledged that the market will get plenty of guidance before any tapering actually happens. "When we see ourselves getting to that point, we’ll community that clearly to the public so nobody will be surprised when the time comes," he said on Jan. 27.
The Fed has been signaling for some time that its policy on rates and inflation is part of a new policy normal, and it will tolerate higher levels even as employment rises and the economy runs hotter. One expert says the truth is that inflation has been in secular decline for decades, and even all the money printing post-financial crisis failed to spark it. Inflation seems to retain more power as a political sound bite, especially among Republicans, than as a market force.
