The financial markets like the S&P 500 and the Nasdaq have experienced brutal downturns during May. Many companies listed on major stock exchanges have shed billions of dollars from their market capitalisations. Billionaires saw their wealth decline significantly, while other billionaires became millionaires. 

Spending sprees became spending cuts, and stellar business valuations became a fire sale to attract investors as money dries up. Lucrative industries empowering economies are becoming bubbles. 

More and more evidence suggests that the global economy is on its way to a recession. Investors seem worried, and it seems that not even precious metals like gold can protect them from recession woes.

Recently, economists spoke about inflation, and now they’re talking about stagflation—the mix of inflation and unemployment. One thing leads to another. As inflation increases, the price of goods and services increases too, people buy fewer items, and as a result, unemployment increases.

Are we there yet?

Plenty of investors call May 2022 the worst month, while other investors call May 2022 the worst month so far.

The laws of demand and supply determine the prices of investments in financial markets. Prominent investors believe that the stock market is in a bubble attributed to the “free money” given during the pandemic to kickstart the global economy, meaning more pain is on the way. 

The medicine administered to cure the economic downturn of the COVID-19 to restart the economy has evolved into other serious side effects described as rare in the consumer medicine information leaflet accompanying the medicine. 

The Russian invasion of Ukraine and sanctions imposed by the US, EU and the UK exacerbated the global economic recovery. Some believe that the sanctions did more harm to those imposing them than those receiving the beating at the baton’s end. 

Financial markets as future economic predictors

Financial markets like the S&P 500 and Nasdaq are precursors to upcoming economic events such as a shift from inflation to stagflation, a recession and a food crisis.

Financial markets rely on investors’ sentiments and emotions, i.e. what may happen, while Government agencies publish economic data such as economic growth and rely on historical data, the past. Financial markets are susceptible and proactive, while economic data is reactive.

Financial markets are most often reliable in predicting economic data. Therefore the effects of the economic data would already be priced at the prices of investments. A case in point is when the Federal Reserve increased interest rates by half a per cent in May 2022. Given that the markets guessed the increase and the rate of increase, the markets didn’t react to the Federal Reserve’s news. 

Had the Federal Reserve not increased interest rates or markets guessed the interest rate increase incorrectly, the markets would have reacted to the news.

Two schools of thought

There seems to be some consensus that a recession is on its way. Others believe that we’re already in a recession based on the recent performance of the financial markets.

One school of thought believes that agencies like the Federal Reserve and other central banks need to increase interest rates to avoid further inflation and recession. On the flip side, others believe that a recession is a necessary evil to control inflation.

Whichever scenario you consider as the most likely, one cannot but agree that the economic outlook in the short-term isn’t comforting.