- Global stock markets struggled over the past three months as rising inflation became a major concern.
- COVID-19 continued to affect markets and economies, with the Omicron causing some volatility towards the end of 2021.
- The Bank of England raised interest rates to reel in higher inflation
Over the past three months, higher inflation and the prospect of interest rate hikes had a major influence on stock markets around the world.
Several of the world’s major central banks began to respond to rising inflation, with the US Federal Reserve winding down the support measures it put in place for the pandemic and signalled interest rate hikes for 2022, while the Bank of England opted in December to raise interest rates for the first time in three years.
The emergence of the Omicron variant of the virus that causes COVID-19 appeared to spook investors in late November, but this gradually subsided when it was deemed less severe than first thought. Fears remain over Asia, however, where zero-COVID policies may lead to further global supply chain bottlenecks.
Global stock markets as a whole delivered negative returns during this time, although there were major differences between markets. China, Japan and the US were notable for negative returns, while the UK stood out for its positive returns.
Inflation was the dominant story over the past three months, displacing COVID-19 as the biggest influence on stock markets. In December, consumer price inflation in the UK, which measures the rise in cost of a basket of goods, reached a 30-year high of 4.8%.
This was not an isolated incident, either, as inflation in the eurozone hit a record high of 5% and in the US it reached 7%, a level not seen since 1982. In the UK, rising prices for food, furniture and clothing were driven higher by surging energy costs and disrupted global supply chains.
It was not all bad news, however. The UK’s gross domestic product (GDP), which measures the value of goods and services produced in the country, returned to pre-pandemic levels in November. Fears around the Omicron variant of the virus that causes COVID-19 caused a small setback to GDP growth in December, but in general, the UK economic recovery appeared to be outpacing forecasts.
In the US, the inflation story was also a key concern for investors and, to a certain extent, it outshone some of the more positive news. For example, the unemployment rate fell to 3.9% in December, the lowest point since the pandemic began. In February 2020, just before the pandemic upended the global economy, unemployment in the US stood at 3.5%.
While the US central bank, the Federal Reserve, did not raise rates to quell inflation like the Bank of England did in December, it did indicate that it would raise rates throughout 2022.
Similarly, Europe grappled with many of the same issues as other parts of the world: rising consumer prices, surging energy costs and concerns about Omicron. While job creation was good and the business sector grew throughout the quarter, overall economic activity slowed down over the past three months.
Asia Pacific and the emerging markets had a mixed quarter. China, in particular, grappled with subdued demand, surging inflation and a slower economy. In December, the Chinese central bank responded to its faltering economy by cutting its benchmark lending rate to 3.8% from 3.85%. In emerging markets, the key issues were slower vaccination rates, the quickly spreading Omicron variant and economic output that continued to sit below pre-pandemic levels.