The volatile performance of investment markets during the last several weeks has given rise to justifiable concern. Global markets have been battered recently by several negative influences including warnings of decelerating corporate profitability, the chronically weak European currency, rising oil prices and persisting concerns associated with price inflation. The inflation threat is particularly troublesome, as it strips the market of a safe haven for investors and leaves even the most diversified of portfolios exposed to a potential decline in performance. As a result, it is important for investors to carefully assess the outlook for global inflation in evaluating their portfolios. Given the vigilance of global policy makers in fighting inflation, long-term investors should hold steady despite the current market fluctuations.
Inflation is at the core of the recent market malaise.
The higher cost of capital is resulting in increased corporate debt expenditures, which is now squeezing corporate profit margins. The weak euro has added to these market pressures, as it is reducing revenue streams for US multinationals and inducing inflationary pressures in Europe due to strong global demand for relatively inexpensive products from the region. The rise in oil prices over the last year has also created pricing concerns, as it is increasing corporate input costs and constraining global profitability even further. As a result of these widespread pressures, major multinational corporations have repeatedly announced in recent weeks that their earnings performance for the third quarter would not match up with the phenomenal gains enjoyed in previous quarters. Investors that become reactive in an inflationary climate may expose their portfolio to additional risk.