Oil is getting more expensive and the market immediately wonders if inflation will return. Energy feeds into almost everything – transport, manufacturing, and food prices. When it costs more, companies sooner or later pass that on to customers. And that’s exactly what the Fed doesn’t want to see.
The second pressure comes from the bond market. A bond yield is the interest the government pays investors for borrowed money. When it’s high, it has two effects:
- Financing becomes more expensive. Companies borrow at higher cost, which eats into their profits.
- Future earnings are worth less today. When a safe government bond offers a decent yield, investors want a higher reward for the risk of holding stocks.
Growth companies are hit the hardest. These are mainly technology firms and companies whose big profits are still to come. Their price is based on expectations for the future, and when rates are high, the market prices that future lower.
Be prepared for market swings. But don’t forget that it’s precisely on such days that opportunities are born.