Another Inflation Jump Resumes Stocks’ Tumbling Ways

The description of inflation as transitory is even more of a laughingstock now. A hotter-than-expected inflation report landed with an unwelcome thud this morning: The Consumer Price Index jumped 7.9% year over year in February, a fresh 40-year high.

Stocks greeted these ill tidings by returning to their falling pattern. After a nice pop up Wednesday of2.6%, equities were down on the news, with the S&P 500 descending 1% and the Nasdaq Composite slipping 1.5% at the outset of Thursday trading.

Accelerations in food (up 7.9%) and energy (rising 25.6%) prices led the inflationary climb. Oil in particular, although it has dipped some this week, has been spiraling upward in 2022 as the stock market dropped. Then there’s the war in Ukraine to consider. The war-prompted shrinkage of Russia’s oil and natural gas plus both nations’ wheat in the world markets is increasingly felt in overall price hikes.

In the view of Bill Adams, chief economist for Comerica Bank, “Inflation will accelerate in March and April as the knock-on effects of the Russia-Ukraine war push prices even higher at supermarkets, gas pumps, and on utility bills.”

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Before the war, which started February 24, Russia was the globe’s second-biggest oil and natural gas producer, and Russia and Ukraine together exported a quarter of the world’s internationally traded wheat, he writes in a research note. “Disruptions to supplies of those commodities will cause a big hit to U.S. consumer spending power at a time when inflation was already historically high,” Adams warns.

The mood on Wall Street is sour due to inflation’s rampage. “It’s quite possible that year-over-year inflation breaches the psychological benchmark of 10% by mid-summer, causing a breakdown in confidence and hinderance to growth, particularly in more price-sensitive developing markets,” predicts Peter Essele, head of portfolio management at Commonwealth Financial Network.

If a silver lining exists in the CPI report, used car prices’ 0.2% slipping is it. This category had been skyrocketing. The used car decrease “could signal the beginning of the much-anticipated deceleration in goods prices,” says Charlie Ripley, senior investment strategist for Allianz Investment Management.

Total pension fund assets in the 22 largest global markets rose to a record $56.6 trillion as of the end of 2021, up from $52.9 trillion the previous year, according to new research from WTW’s Thinking Ahead Institute.

The 2022 “Global Pension Assets Study” estimates that the $56.6 trillion in pension assets accounts for 76% of the gross domestic products of the 22 economies, which consist of 21 countries and Hong Kong. It also said total pension assets have nearly doubled in the past decade, from $29.3 trillion in 2011.

The study found that pension market concentration has increased, and that the US continues to be largest pension market, with estimated total pension assets of just over $35 trillion. The UK and Japan are a distant second and third with $3.86 trillion and $3.68 trillion, respectively. Combined, the three markets account for more than 75% of all pension assets worldwide. And the seven largest markets for pension assets—Australia, Canada, Japan, the Netherlands, Switzerland, the UK, and the US—account for a combined 92% of the 22 largest markets.

“Pensions are becoming better funded in many countries but have also been subject to the growth in value of financial markets,” Marisa Hall, co-head of the Thinking Ahead Institute, said in a statement. “High valuations imply financial security but also pose difficult questions about future allocations—and will encourage many pension schemes to continue looking beyond the traditional asset classes in order to maintain returns.”

For more stories like this, sign up for the CIO Alert newsletter. 

Asset allocation patterns have steadily shifted since 2001, according to the study, with the allocation to equities decreasing while investments in other assets such as alternatives and real estate have grown over the past 20 years. The average global asset allocation within the seven largest markets as of the end of 2021 was 45% in equities, 34% in bonds, 19% in “other,” and 2% in cash. Australia and the US have the largest asset allocation to equities at 53% and 50%, respectively, while the UK and Japan invest the most conservatively with only 29% each in equities and 62% and 56%, respectively, allocated to bonds.

Defined contribution pensions continue to show strong growth, and after accounting for the majority of assets in the seven largest pension markets for the first time in 2020, DC pensions now represent 54% of all pension assets. The study also found that the 20-year growth of DC in the seven largest markets has been 7.8% per year, compared with 4.1% per year for defined benefit plans in dollar terms.

Additionally, the study said pension assets have significantly outpaced economic growth in each country in recent years. It said that during the past decade, the ratio of pension assets to GDP increased the most in the Netherlands, Australia, Switzerland, and the US, in that order. The Netherlands has the highest ratio of pension assets to GDP at 213%, followed by Australia (172%), Canada (170%), Switzerland (157%), the US (153%), and the UK (124%).