Investors should prepare for a 10% share market correction over the next month, one financial expert has warned.
Global supply chain pressures, rising energy costs and reopening economies have all conspired to keep inflation around for longer than the central banks had hoped.
This has already forced some countries to raise interest rates.
Perhaps the last of the "holdouts" — the Reserve Bank of Australia — this week announced the early abandonment of bond yield curve control.
"Today's decision is a sure sign interest rates are going to start to rise," Monash University economics lecturer Isaac Gross said on Tuesday.
"Not today, or even for the rest of this year, but sooner [than] was previously expected."
And from next month the US Federal Reserve will start doing the same, reducing its balance sheet.
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Inflation is running both "hot" and "stickier"
All this uncertainty over interest rates is trouble, according to DeVere Group chief executive Nigel Green.
"Inflation is running hotter and is becoming a bigger issue than most analysts previously expected," he said.
"The real story for the markets is how the Fed, the world's de facto central bank, will talk about inflation."
Green believes that the US Federal Reserve will now abandon the term "transitory" to describe current inflation, and this will rock share markets like the S&P 500 Index (SP: .INX) and S&P/ASX 200 Index (ASX: XJO).
"Inflation appears to be stickier than they had expected. This means that they are likely to have to raise interest rates sooner and/or more aggressively," he said.
"Therefore, markets are actively pricing in 2 or 3 hikes next year and this could lead to a 5% to 10% market adjustment over the next month."
Corrections are opportunities for wise folk
Central banks were forced to resort to near-zero interest rates and keep bond yields down when the COVID-19 pandemic first hit last year.
But with economies now running hot, they feel the stimulus has done its job and a gradual transition to more "standard" monetary conditions must begin soon.
In Australia, Gross believes this week was the end of an era.
"We don't yet know how quickly variable interest rates will start to rise, but given the Reserve Bank has walked away from a battle to defend yield curve control, we do know it'll be a long time before it even considers doing it again."
According to Green, his predicted shock to share markets should not trigger panic in long-term investors.
"A market correction will be seen by savvy investors as the first major step towards the likely return to normal monetary policy and they will be seeking out the inherent opportunities that will be presented."
