Markets are responding to growing fears that the Federal Reserve will push the US economy into a recession in its fight to repress inflation. Traders are now wagering that the world’s most significant central bank will increase its already aggressive schedule of interest rate hikes following data on Friday that showed inflation in the United States accelerated again in May.
Brutal selloffs are roiling riskier assets. The Nasdaq Composite has fallen 8 percent since Friday. Bitcoin, the world’s biggest cryptocurrency, has lost 26% in five days after major cryptocurrency lender Celsius suspended withdrawals on Monday citing “extreme market conditions”.
Even traditional safe haven government bonds are reeling. The yield on the 2 year Australian government bond skyrocketed to 3.05% shortly after midday, as investors dumped interest rate sensitive instruments. Pain also rolled along the curve with the yield on 10 year Australian government bonds climbing to 3.97%. Yields rise as prices fall.
Global markets are plummeting, as investors are trying to deal with a toxic cocktail of stubborn inflation, climbing rates, slowing growth and record commodity prices all fueled by lingering effects of the pandemic and Russia’s invasion of Ukraine.
What might occur next and how should long-term investors react? We’ve gathered answers to these questions and more below.
How did we get here?
A speculative boom partly stoked by low interest rates and government support aimed at shielding economies from the worst of the pandemic.
Central banks undershot the speed of inflation and its stickiness, and are now hiking rates faster and higher than anticipated by most and in the face of some troubling signs of slowing growth.
Inflation is turning out to be much harder to rein in in part because energy prices are soaring (and not only because of Russia).
What could happen next?
Peter Warnes believes the markets have further to fall. Mark Lamonica agrees.
The worst-case scenario for many is stagflation, a combination of high inflation and sluggish growth not experienced since the 1970s.
But others say the Australian share market might be a relative outperformer.
What should I do now?
Block out the stock shills and reset your philosophy of investing.
Revisit our down-market guides to them for retirees and pre-retirees, and for those under 40.
Read our eight-step guide to surviving a bear market.
What are the opportunities?
For those seeking safety, we’ve put the best term deposits and savings accounts on the table.
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