As the first month of the year ended and the second month began, one thing became clear — the recent increase in volatility could be with us throughout 2022. With central banks across the globe indicating a significant shift in policy, the markets are adjusting to the realization that the ultra-low interest rate environment could be coming to an end.
The expectation of higher inflation and reduced central bank liquidity has sent a ripple effect throughout the investment markets. Interest rates are moving higher, credit spreads are widening and stock markets are becoming less stable. These wild swings have been apparent in the differentiation we are seeing in the earnings results across corporate America. Where we once witnessed the rising tide lifting (nearly) all ships, now we are seeing some companies getting punished severely on earnings misses as profit margins are challenged. We should see an increasing importance of underlying fundamentals for each business as excess liquidity is removed from the markets in 2022.
The week will give us even more earnings reports while more news is expected from the Federal Reserve in the coming weeks.
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