Norges Bank Investment Management Thinks Inflation Could Still Land A Blow

Norges Bank Investment Management Thinks Inflation Could Still Land A Blow
Theodora Lee Joseph, CFA

about 1 month ago2 mins

What’s going on here?

The world’s biggest state-owned investment fund suggested that inflation could still issue a blow to the market.

What does this mean?

Norges Bank Investment Management owns 1.5% of the world’s listed companies, making it the biggest single owner of stocks out there. So with $1.5 trillion worth of assets under its belt and an in-depth understanding of market trends, the management team’s opinion is worth its weight in, well, stocks. And right now, the fund is sending out an ominous prediction that stubborn inflation could hold back market returns for years to come. That’s partly because workers are demanding higher wages in many countries, which would let them keep up with increasing prices and, in turn, encourage retailers to pull up prices further – a spiral that stokes inflation. Consider, too, that international trade is at a heightened risk of disruption now that war has broken out around the world, and there’s reason to believe that prices could stay in the danger zone for some time.

Inflation and trade issues

Why should I care?

For markets: Keep it interesting.

Central banks have been looking at increasingly manageable inflation as their ticket to lower interest rates – the move that would make it cheaper for shoppers to fill their carts and, as a result, energize economies. But if inflation stops slowly inching lower, central banks could be forced to hold rates where they are. Then because higher-for-longer rates tend to weigh on stocks’ valuations, the market’s returns would likely take a turn for the worse.

Zooming out: As good as it gets.

Goldman Sachs is cautious about the coming months, too. The big bank has suggested that investors’ sentiment and stock ownership is just about as high as it could be in today’s circumstances, leaving little room for the market to positively surprise anyone. Plus, most investors have been enticed by only a few stellar stocks, which amplifies the risk of disappointment.

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