Serious stock market rout becomes a very real possibility

It will not happen today or this month, but there is a growing sense of foreboding regarding equity markets.

After the free cash run of the past two years valuations hit unsustainable levels. We have had corrections before, but stocks are so far only gradually pricing in what is the predominant risk for the Untied States: An aggressive rate hike cycle as it enters recession?

The prospect of rampant inflation that demands significant and aggressive hikes, while at the same time the global economy and the US enter a slow-down created as a hangover result of the massive stimulus of recent years, and added to by on-going supply chain disruption and now the conflict in Ukraine, do not a favourable investment environment make.

Fresh record highs were seen in New York in the first week of the year's trading. Ever since then it has been quite the rollercoaster, but with a persistent heavy bias. There was talk of war, but few really expected it to happen. Now that it is here, the ramifications for Europe and the global economy are far worse than anyone could have predicted. Energy prices look set to stay stubbornly high for the foreseeable future, and food availability and pricing has become a major issue.

For the European economy, it really is about the blow-back effects of sanctions and in particular the impact on consumer and business sentiment. ‘Caution' will be the dominant response through the rest of this year.

The European slowing will also flow through to the US economy and dampen equity market sentiment. If the US were to slip into some form of recession as well, alongside a permanently slowed China, one would be left asking, just why are stock prices so high? Do I really need to buy more stocks near record levels with rates going up, a war in Europe and a slowing global economy?

The US stock market can most definitely fall a further 20% should the talk of recession start to look rather likely. The “great wash” of money is about to be unwound and the persistent bullish sentiment merely for the sake of it, could well leave equities as the Emperor with no clothes for 2022.