The stock markets have delivered drama so far in 2022!
The stock market has so far been turbulent for many and just wait until the central banks really get started!
I have many systems that I follow daily in the stock market and this stock market year has so far delivered on drama! For many of us, it has been a brutal journey. The fall in prices in many growth stocks and many green and digital stocks has been sharp. It has so far exceeded what an investor can classically expect from the start of the stock market year.
The pricing of shares is driven not least by the institution that defines the stock market climate of the world. We have long known that the importance of the US Federal Reserve for “pandemic share pricing” can hardly be overstated. And this year, the Federal Reserve (FED) has sharply changed its position. Also, officially. Also, in the party speeches. Now it is likely that the first interest rate hike from there will already come in March. As recently as last autumn, the Fed's first post-pandemic rise in the key policy rate was expected in 2023. Now the market is pricing in four or five rate hikes only during 2022. This is a huge change in monetary policy stance.
The prospect of higher interest rates and zero money printing plagued investors several times in 2021. Naturally enough. It is clear that many calculations changes when the stimuli that have fueled investor willingness are phased out. But it is only now that this is really taken seriously by broad investor groups. And really strikes also in the broad indices. At the time of writing, the S&P 500 in New York is down approx. 12% since New Year. NASDAQ is also down approx. 20% so far this year (see screenshots below).
YTD development of S&P 500. Source: Infront.
YTD development of NASDAQ 100. Source: Infront.
Overall, the earnings season we are now entering can help to change a bit of the stock market climate. Good earnings from the "giants" can help lift the mood a bit. Concerns about higher interest rates and lasting inflation will still be below the surface. Throughout the year, the FED will constantly "steal" new headlines. Inflation considerations will be central. It is no longer automatic central bank support to harvest if the stock market fall is strong enough.
2022 will be a year in which much depends on whether the FED finds the right "dosage" – what I call “the optimal balance”. Interest rates will rise to stagnate inflation, but preferably not so fast that investors will generally panic. At the same time, we have the geopolitical challenges in Europe with the war between Russia and Ukraine. How long the war will last is also very uncertain. However, we can be reasonably sure of one thing - it is not positive for the market in general. Certainly, we do not get a boring stock market year. Not this year either!
