Inflation fears and the Federal Reserve's 180-degree turn have led to a more aggressive repricing of valuations
The US Labor Department recently released new data showing that the US CPI inflation rate has reached 7% (the largest increase in nearly 40 years). As the inflation rate hits a multi-decade high, market rumors are growing that the Fed will be forced to implement quantitative tightening, which could burst asset bubbles—including but not limited to stocks, bonds, and housing.
After more than a decade of a low-interest-rate environment, we have found that financial markets have become deeply entrenched in a 'everything is a bubble' state—a point we discussed in detail in our previous articles. Now, the rules of monetary policy dictate that the great battle over interest rates will lead to a repricing of valuations across multiple asset classes (stocks, bonds, housing, etc.). Therefore, with interest rates expected to rise significantly, the idea of valuation resets seems credible. However, the likelihood of the US 10-year Treasury yield climbing above 2.5%-3%—despite higher inflation levels (7-10%)—remains slim.
Although broader indices (especially the Nasdaq 100) remain near record highs, the situation is far from what it appears, as nearly two-thirds of the tech-heavy Nasdaq index is already in a bear market (down more than 20% from their 52-week highs), and about 40% of Nasdaq 100 components are down more than 50% from their 52-week highs. Thus, it can be said without exaggeration that the current market is...