Investors received a rude awakening as the nine-year bull market ended this January, as many on the Street turn more bearish regarding risks to the market, including geopolitical unrest, rising interest rates, chaos in the White House and heightened trade tensions with major economies such as China and Mexico. As uncertainty mounts, one analyst on the Street views inflation as the single biggest risk to investors, ahead of everything else, attributing to it the recent surge in market volatility. (See also: 4 Oversold Stocks Poised to Soar on Earnings.)
Torsten Slok, chief international economist at Deutsche Bank, recently spoke in an interview with CNBC indicating that "inflation is the mother of all risks" currently facing U.S. equities.
The market has gotten a much needed breath of fresh air this week, as stocks secure a decent comeback from a series of recent sell-offs. As the Federal Reserve is expected to hike interest rates and the economy continues to post strong growth, an increase in traditional measures of inflation in the U.S. have again regained investors' attention, as outlined by CNBC.
2018 Is Prime for Inflation
"We've been waiting for inflation literally for the last nine years since the Recession ended in 2009," stated Slok. He told CNBC that his clients have been raising a significant increase in questions regarding inflation. The difference between this year and previous years, wherein inflation has been pretty much anemic, he suggests, is that the strength of the U.S. dollar is falling. The U.S. dollar index, which plummeted last year, has hovered around the 90 mark for the majority of 2018, noted the analyst. Further, a massive fiscal expansion over the past 10 years has pushed the economy toward overheating, while a tighter labor market and recent price pressure have coincided with the an escalation in global trade tensions and moves by the White House to slap greater tariffs on imports.
Bank of America's most recent monthly global fund manager survey found that 82% of respondents expect the consumer price index (CPI) to rise over the next year. Earlier in April, the Labor Department reported that its CPI increased 2.4% year-over-year (YOY), marking its fastest annual pace in 12 months. Meanwhile, the personal consumption expenditures price index, the Fed's preferred measure of inflation, ticked up to 1.6% for February after four months of posting a growth rate of 1.5%.
Slok indicates that if further evidence of rising inflation rolls in over the next few months, the Fed could choose to raise interest rates more than expected, resulting in a continued rally for the 10-year treasury yield. Nonetheless, the analyst noted that an overshoot in inflation does not necessarily translate into a breakdown in the equity market, as long as the 2% mark is not breached substantially to the upside. If the market is not ready for more inflation however, rockier times could be in store following 2018's already volatile run. (See also: 6 Safe Haven Stocks for a Stormy Market.)