History rarely repeats itself in the markets

Financial markets have just experienced significant turbulence, with the conflict between the USA and Iran rapidly escalating into a wider flare-up across the Middle East. This has been accompanied by a surge in the price of many commodities, led by oil.

As is often the case, this crisis came without warning. At stock market level, however, the impact has ultimately been short-lived, with most of the losses recorded in March now erased. Nevertheless, the situation remains tense: the Strait of Hormuz remains largely blocked to traffic, and the threat of fuel shortages in the coming weeks is very real.

Why this calm in the equity markets?

Could it be the sense that, in equity markets, previous crises quickly faded, both in 2020 and in 2022? Or the feeling that economies are performing well enough for the risk of a slide into stagflation (a recession combined with high inflation) to be considered sufficiently low?

It is difficult to say at this stage, but one thing is certain: during previous crises, including that of 2008, central banks and governments intervened extremely forcefully to 'prevent' the ship from sinking. Liquidity injections were enormous, multiplying central banks’ balance sheets ninefold. Governments, for their part, drew on public funds to the extent of increasing public debt ratios by more than 20% of GDP in many countries.

After massive interventions, austerity takes hold

Every coin has two sides, and these policies have led to an era of negative interest rates in Europe. Today, we are paying the price for fiscal slippages, which will constrain the authorities' ability to act for quite some time. Discussions around possible measures to mitigate the impact of rising energy prices on purchasing power clearly illustrate this period of forced austerity.

While optimism currently prevails in the equity markets, the situation is different in the bond markets, where there is a fear of an inevitable rise in inflation that could cause the same damage as in 2022. The shock was extremely severe at that time after years without inflation.

Rusty central banks

At the time, the slowness of central banks to react triggered real panic in these markets: within a few weeks, 10-year rates rose from 0% to 3% in Belgium and from 1% to 4% in the United States.

Putting these concerns into perspective

These concerns should be viewed in context today, as history rarely repeats itself. When inflation suddenly surged in 2022, it had been almost 50 years since a similar situation had occurred. One would have to go back to the second oil shock of 1979 to find such a rise in prices. It is therefore understandable that, in 2022, reflexes were somewhat rusty and that inflation figures had to reach astronomical levels before central banks decided to act. In the United States, for example, inflation rose from almost 0% to 9% between 2021 and 2022 without the Fed taking action. In Europe, meanwhile, the ECB waited until inflation reached 10% before raising its key rates.

Let us hope that this time it will take much less time, which is rather reassuring.