Inflation, rate hikes and investment! Does the stock market lead the economy?

On the investment road, we may need to be resilient and resilient like a rubber band to deal with different economic and financial environments.

The economic operation is cyclical, sometimes expanding, sometimes contracting, and constantly changing, and in different economic cycle stages, the financial market's prosperity will be different. Recently, inflation, interest rate hikes, and a possible recession have made the investment market stunned.

Inflation and interest rate hikes

Many countries and regions are currently facing the problem of high inflation. Inflation refers to a general rise in prices, and the causes are often complex. The damage caused by the epidemic of more than two years to the global supply chain and freight industry, rising energy prices, and the conflict between Russia and Ukraine are some of the explanations for the current inflation. However, the causes of inflation in different countries and regions are not exactly the same.

Raising interest rates is a common monetary policy used to suppress inflation. Inflation in the United States remains high, and the Federal Reserve has raised interest rates several times this year. After raising interest rates by 4.1 percent and 0.5 percent in March and May, it then raised interest rates by 4.3 percent in June, July, and September respectively. The market expects that the authorities will continue to raise interest rates in the short term. Hong Kong is also expected to need to raise interest rates under its linked exchange rate.

The stock market leads the economy

The performance of financial markets is inseparable from the economy. If we can understand the relationship between the two, it should be beneficial to our investments. As far as the stock market is concerned, if we say: "The performance of the stock market reflects the current economic situation," this statement seems to be a matter of course. However, this may not be the actual situation. The stock market performance often precedes the economy, usually 3-6 months ahead, and is a tool to measure the economic downturn. For example, after the U.S. Federal Reserve raises interest rates, whether the U.S. economy will experience a recession next year has been a focus of discussion in financial markets recently. Whenever there are warning signs of economic recession, such as an inversion of the yield curve (that is, short-term interest rates are higher than long-term interest rates), Or if the consumer confidence index falls, the stock market will often "fall first" instead of waiting until a recession is confirmed before falling.

Investment is a "forward-looking" matter. If you can look forward to economic performance, you can make corresponding investment arrangements. The yield curve, consumer confidence index, purchasing managers index, M2 money supply, and stock market indexes such as the S&P 500 index are all leading indicators commonly used to measure economic trends. Paying more attention to the changes in these leading indicators can prevent us from being "behind the scenes" to changes in the economy, and will help improve our resilience and flexibility in financial management.

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