Key points
- Inflationary shocks such as Russia’s invasion of Ukraine have almost always led to deflation through the subsequent supply response and the slowing of demand.
- Idiosyncratic stocks offer solid upside potential—even in this challenging environment.
- After the rotation we have seen over the past 12 months, we are not overly concerned about a value factor headwind.
Inflation is driven by the intersection of supply and demand. Before COVID‑19 entered our lives, it was clear that supply exceeded demand in many parts of the world—and there was little impulse for strong inflation. We had lots of energy, lots of labor, and not enough growth. Technology was unlocking capacity in every sector, which had a deflationary effect. Add to this the fact that there were changing demographics—with decreasing populations—and large amounts of debt, and it is clear why generating inflation was a challenge for the global economy.
A "Shock on Top of a Shock"
Russia‑Ukraine conflict creates further complexity
For Illustrative Purposes Only.
The global spread of COVID‑19 had a huge impact on demand and supply. On the demand side, the U.S. Federal Reserve took extraordinary measures to stabilise the global economy, lowering the fed funds rate to 0% and rolling out massive monetary stimulus to support a global economy that would otherwise have faced serious problems. The Fed effectively backstopped risk. Private equity, venture capital, cryptocurrencies, and hyper‑growth technology companies received unprecedented flows of capital. Extreme valuations emerged for the most speculative areas, and these are now unwinding—putting pressure on growth stocks. Elsewhere, governments transferred cash to private sector savings and investment.
This post was funded by T. Rowe Price
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