One year ago today was 2022’s first day of market trading. 365 days later, the stock market landscape looks nothing like it did after one of the worst years in recent memory. With the benefit of hindsight, we now see that the long-term stock market rally that began during Obama’s first term finally ran its course. But we did not know that one year ago today, when the S&P 500 hit a record high, and Tesla rose 13.5%. That very Monday was the end of the one-way street that saw the S&P 500 rise more than 600 per cent since March 2009, the nadir of the Great Recession.
By Wednesday of that week, the Federal Reserve released its minutes from a previous meeting where they discussed their rising alarm over inflation, which meant they would need to raise interest rates quickly. Investors read the writing on the wall, and the S&P saw a loss of 1.9% due to a stock sell-off. From 2023, we can now see how that sequence of events was a preview of what would end up occurring over and over again throughout the rest of the year. Analysts refer to 2022 as a “generational shift” for financial markets; the Fed repeatedly raised interest rates – often steeply – to combat rising inflation. Those moves are just now starting to pay off as price increases have finally started to slow. Gone are the days of low interest rates, which encourage investors to take risks. These risks often come in the form of new tech companies, debt markets, or even cryptocurrencies, and if rates are low, it is worth it to gamble a bit. Now that rates have been raised so much in such a short span, people are far less willing to take risks, and that has a chilling effect on the economy as a whole.
Screeching to a Halt
Since January 3rd, the S&P has fallen by 19.4 per cent, which is its worst performance since 2008. Crypto’s “safe bets” like FTX have been revealed to be little more than modern-day Ponzi schemes. And debt is definitely not cheap. All signs are pointing to a recession, but the Fed has signalled that inflation remains far too high, so 2023 will see further interest rate increases. Globally, these rate hikes are how central banks fight inflation. When rates go up, so do borrowing costs, which reduces economic demand and should, in theory, stop prices from rising. With costs higher, that typically means lower profits for companies, which spooks investors into paying less for stocks. In 2022, companies that had relied heavily on low interest rates, like tech companies, were hit especially hard. The Nasdaq Composite index, which is comprised of tech stocks, fell 33.1 per cent in 2022. Tesla’s stock fell 65%.
Despite the inflation issue, the US economy still performed better than most because Europe had to battle both inflation and the energy crisis caused by Russia’s invasion of Ukraine. This led to investors putting more money into the dollar, leading the dollar to actually surpass the euro in value for the first time in 20 years. Looking forward, investors are expecting more battles with the Fed. We know it is going to be bad, we just do not know how bad.