Why the Stock Market Continues to Surprise Us

Why the Stock Market Continues to Surprise Us

Being a researcher rather than an artist, El-Erian promptly attempts to solve the mystery that faces him, by understanding why stocks have regained their footing. One reason, he writes, is the strength of the US economy. It is true that inflation has soared, which doesn’t help equity prices. On the other hand, US corporate profits rose by 26% in the fourth quarter of 2021, on a year-over-year basis, with consumer demand remaining robust. (Although corporations quite naturally dislike paying high wages, doing so does increase demand for their products and services.)

Another explanation is that, despite inflation, commodities shortages, and the economic sanctions on Russia, the world’s financial system isn’t stressed. El-Erian cites Goldman Sachs’ Financial Conditions Index, which examines global interest rates, credit spreads, exchange rates, and equity valuations to determine whether money is relatively easy or relatively tight. Although up sharply from its summer 2020 levels, when central banks were highly accommodative, that index remains only slightly above its 10-year average. It is not signalling a financial crisis.