What is going on in the stock market this year?
What is going on in the stock market this year?
If that’s a question you’ve asked yourself then read on…
In 2022, we’ve seen some big daily moves in the stock market and even big changes intraday. This is because we have three major separate events occurring in each of the three largest economies in the world. This has created uncertainty; markets don’t like uncertainty and are trying to gain footing and determine if the next move is up or further down.
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In the US, we have rapid inflation, and the federal reserve responding by raising interest rates. The market is unsure of how effective the raises will be in curbing inflation, but what we do know is that this means technology companies' expenses are increasing as the cost to borrow money to fuel their growth is increasing. Higher costs equal less profitability, so we’ve seen technology stocks sell off dramatically this year.
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The tragic war in Ukraine has created uncertainty for the entire European economy.
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China’s zero covid policy has once again disrupted global supply chains and created uncertainty about how this will affect their economy and economies around the world.
These events have combined to make this one of the worst starts to a year ever for both stocks and bonds.
The good news is this sort of market movement is normal. Many of us forget that double-digit declines during a year are normal. After only one 5% pullback all last year, markets have provided an unfriendly reminder in 2022. In fact, since 1980, the average correction each year is 14.0%, putting this year’s 13.0% correction in perspective. The chart below from First Trust does a great job illustrating intra-year market movement.
For example, look at the year 1980; it is a good reference point as the Federal Reserve was increasing interest rates to combat inflation that had reached 14%.