Getting inflation right is a make-or-break moment on Wall Street

God help whoever on Wall Street botches the inflation call.

God help whoever on Wall Street botches the inflation call.

After a three-decade hiatus, anxiety about rising consumer prices is testing the analytical skills of money managers and professional traders like nothing since the short-lived pandemic panic. The stakes couldn’t be higher: The long regime of mild inflation and low interest rates has helped to drive up stock and bond valuations. Now, with inflation unexpectedly hitting 6.2 per cent in October from a year earlier, something new is on the horizon. A daisy chain of supply bottlenecks has driven prices higher as companies fight to guard their profits and consumer demand remains high. Is it a post-pandemic blip that will resolve itself? Or a sign of more turbulence to come?

For people working in finance, it’s a moment of extreme career risk—or a chance to be a hero to their bosses and their clients if they get it right. Many have never been here before. “There’s people that are halfway, a third of the way through a career and they haven’t seen inflation,” says Kim Forrest, founder and chief investment officer at Bokeh Capital Partners.

Inflation is the first hurdle every investor has to clear, and it’s baked into every pro’s model of the fair price to pay for a bond or a stock. But it’s not easy to get a read on how investors are processing the latest spike. Wall Street strategists are flummoxed. Of the 21 forecasters tracked by Bloomberg, the lowest yearend target for the S&P 500 index is 3800 and the highest is 4800—that 26 per cent spread is among the widest in a decade.

In the Treasury market, volatility is surging. And a recent note from Goldman Sachs observed that the companies most beloved by hedge fund long traders are also the stocks most beloved by hedge fund short sellers—the ones who bet on stocks falling. In other words, professional speculators evidently expect the same stocks to rally and to plunge.

Everyone has a different take, but everyone is increasingly focused on the same consumer price index releases. “There’s so much concern because we haven’t seen this kind of inflation in many, many years,” says Kathy Jones, Charles Schwab Corp.’s chief fixed income strategist. “The thought really was that it was going to come down very quickly, and it hasn’t come down as quickly as expected, because we seem to roll from one supply-demand imbalance to another.”