Money, as the old market saying goes, can be a source of fear. A recent DWS report points to substantial losses among major global financial assets this year, with a Deutsche Bank executive highlighting a combined decline near 30 billion euros across shares, bonds, and crypto holdings. To put that into perspective, the figure roughly rivals the combined GDP of the world’s two largest economies from 2021 and dwarfs many national outputs, illustrating the scale of investor concern in the current climate.
Investors are pulling back in response to heightened uncertainty that has unsettled markets in recent months. Ongoing pandemic disruptions in China, renewed strains on global supply chains, and Russia’s invasion of Ukraine have sent energy prices higher and stoked inflation to levels not seen in decades. The pressing worry for many market participants, however, centers on how central banks will respond to this price pressure. The key question remains whether policymakers can tighten financial conditions enough to curb inflation without tipping the global economy into a recession or undermining public finances.
less growth
Analysts surveyed by Bloomberg have adjusted their expectations for growth in the major economies. The US growth forecast for 2022 has been trimmed from 3.9% to 2.7% since the start of the year, while the euro area is now seen expanding around 2.7% after a prior projection of 4.2%. In Spain, Funcas forecasters lowered their 2022 GDP outlook from 4.8% to 4.3%, with a further slowdown anticipated in 2023 to around 3%. Additional downward pressure on consumer purchasing power could follow if prices continue to rise while wages lag behind, compressing household budgets further.
The responsibility now rests with central bankers facing a tough path. The current inflation spike stems largely from supply-side constraints, including energy costs, but monetary policy wages only influence demand, effectively making money more expensive. The Federal Reserve has already begun tightening, and the European Central Bank is expected to follow as its ultraaccommodative stance becomes increasingly unsustainable amid the present context.
Oil values have surged, nearly doubling over the past year from around $66 to about $111 per barrel for Brent, a European benchmark. Gas prices have risen sharply as well, climbing from 18 to 87 euros per megawatt hour. Anticipation of rate increases and the prospect of the ECB reducing its extraordinary borrowing facilities have pushed up the debt risk premium, with the spread between the German 10-year bond and the Spanish counterpart widening from about 71 to 113 basis points since January.
Consequently, the MSCI World index, which tracks 23 advanced markets, has fallen roughly 19% from its January peak. Despite trading roughly 60% above the pandemic-era lows, the index has slipped back toward levels seen in January 2021. The broad MSCI ACWI, which includes the 27 largest emerging markets alongside the developed ones, is down about 17% from its January highs yet remains well above the depths reached at the pandemic’s onset.
stock market correction
The US stock market, a major driver of global equities during the pandemic, remains a powerful force behind the current declines. The Dow Jones Industrial Average, containing 30 leading American companies, had been on a long ascent from its March 2009 low, briefly breaking record after record despite the recent downturn since March 2020. Since hitting a January high, the Dow has slipped by around 16%. The S&P 500, comprising the 500 largest listed firms in the country, has fallen nearly 20% over the same period.
Meanwhile, the Nasdaq 100—home to many large tech names—saw a dramatic run that peaked last November after recovering from the pandemic trough, only to retreat about 30% as investors worry about stretched valuations in the sector. The EuroStoxx 50, representing the eurozone’s top 50 listed companies, failed to match its dot-com era highs and has dropped about 17% since the start of the year. In Spain, the Ibex 35 has been more volatile than peers, remaining below its pre-quarantine level after touching a pandemic-era peak in June, but it has managed to outperform other global markets so far this year, slipping only around 2.6% while still showing more resilience than some broader indices.