How little do we know about the new Omicron variant of the Corona virus? The less we know, the more we fear. Hence markets have found a valid pretext for a brutal sell-off. Were valuations overstretched? For most stocks that cannot be denied. If the stock market decline coincides with a slowing economy, stock price targets may need to be revised down significantly. If this perspective unfolds, stocks will look even more pricey after a 10% decline from current levels.
If such sentiment gets the upper hand, we may be in for the 2022 market crash and economic recession. With central banks having opened the money spigots for much too long, there can be no loosening of monetary policy. Once we are in for a serious stagflation, central banks may even be forced to tighten, but will remain ‘behind the curve’. Meek monetary policy will not be able to curb inflation, yet it may trigger a solvency crisis among weaker bond issuers; those which have been kept afloat for too long: the “Evergrande’s” of the worldwide economy.
Will cryptocurrencies resist? If the March 2020 collapse provides any guideline: they won’t. Will precious metals resist? We have seen repeatedly that gold sells-off as margin calls on derivatives requires raising cash “at all cost”. Gold peaked above $1860 after far higher than expected CPI inflation data were released; however the metal slid back below $1800. Yet its decline of about 5% compares favorably to the plunge of the white precious metals. Both the richly valued palladium as the barely recovered platinum and silver faced a stiff downturn, with some daily declines as large as the accumulated weakening of the yellow metal.