Are stock market rallies ignoring rising inflation and rate hikes?

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Stock Markets Surge Amidst Inflation and Rate Hike Concerns

Global stock markets experienced a significant rally, with major indices in the US and Europe showing gains of over 1 per cent. This surge occurred despite persistent high inflation and the anticipation of further interest rate hikes from central banks, which typically pose headwinds to market buoyancy. Investors appeared to prioritise positive developments in geopolitical negotiations and economic data, such as a rebound in US consumer confidence in March, over these underlying economic pressures. The MSCI gauge of global stocks rose by 1.54 per cent, indicating broad-based optimism across international markets.
Investor Sentiment Overwhelms Fundamental Weaknesses

Despite clearly weaker economic fundamentals, including rising inflation and an inverted yield curve, investors have driven a sharp rally in the S&P 500. This rally has been described as one of the steepest in history, surpassing the magnitude of significant rallies seen in numerous previous bear markets since 1927. The Federal Reserve's hawkish stance, signalling faster rate hikes to combat inflation, has also been largely overlooked by market participants. Analysts at Bank of America Global Equity Derivatives Research noted that this rally occurred despite these fundamental headwinds and the Fed's efforts to temper equity market strength.
Key Indices Show Strong Gains, Yet Face Long-Term Uncertainty

Major US stock indices, including the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, all closed higher, with gains of 0.97 per cent, 1.23 per cent, and 1.8 per cent respectively. These gains have put all three indices on track to end March on a positive note. However, this period of strong performance is set against the backdrop of the worst start to a year and a quarter for these indices since the beginning of 2020, when the Covid-19 pandemic first disrupted financial markets.
Bond Market Signals Caution Despite Equity Optimism

While equities soared, the bond market presented a more cautious picture. The benchmark 10-year German Bund yield reached its highest level since early 2018, and 2-year yields turned positive for the first time since 2014. In the US, Treasury yields have risen by 165 basis points this quarter, and over 200 basis points of interest rate hikes are now priced in for 2022, which would mark the most significant increase in a calendar year since 1994. Furthermore, a closely watched segment of the US yield curve briefly inverted for the first time since September 2019, a phenomenon often considered a predictor of future recessions.

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Are stock market rallies ignoring rising inflation and rate hikes?

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