The performance of the US stock market under the shadow of the Federal Reserve in 2022 – Tejaratnews

According to Tejarat News, the first trading day of the US stock market in 2022, January 3, was like another normal day of the rising stock trend that started when Barack Obama was still president. On this day, the S&P 500 index reached a record high. Tesla, the company that boomed the auto industry and made many investors rich, rose 13.5 percent and neared its all-time high.

Quoted from New York Times, but it later turned out that Monday was actually the end of a market that had been moving in a near-constant direction for more than a decade, with the S&P 500 up more than 600 percent since March 2009. Just two days later, the Federal Reserve released the minutes of its previous meeting, indicating that central bank policymakers are so worried about inflation that they may accelerate rate hikes.

Investors got it wrong, sending the S&P 500 down 1.9 percent and sparking a selloff that set the stage for a bearish run for the rest of the year. The past 12 months have marked a generational shift for financial markets as the Federal Reserve, which has struggled to contain inflation in recent decades, has repeatedly raised interest rates. As a result of this effort, price increases have slowed recently.

Consequences of the actions of the Federal Reserve on the stock market

But the Fed’s aggressive actions to slow the U.S. economy, the world’s largest, have had far-reaching consequences.

2022 saw the end of the era of low interest rates that made borrowing cheap and encouraged investors to take risks on stocks of new technology companies, digital currencies and debt markets in search of lucrative returns.

Neither the S&P 500 nor Tesla have returned to their Jan. 3 highs since then. The S&P index fell 19.4 percent year-to-date, its worst performance since 2008. Cryptocurrency giants like FTX have also collapsed and debt is no longer cheap.

But even as the U.S. economy heads toward a possible recession, the Fed still has a long way to go. Although the fever of inflation has subsided a bit, it is still very high and it is expected that the interest rates will increase again and the economic pressure will intensify.

Christina Hooper, senior global market strategist at Inosco, says: “This year, because of inflation, it was the central banks that controlled the markets, and this trend is set to continue in 2023.” The challenge facing the Fed became more difficult in February with the outbreak of the Ukraine conflict. Rising food and energy prices created a crisis in poorer countries that depended on oil and grain imports. In March, the Federal Reserve began raising interest rates.

How does an increase in interest rates reduce inflation?

Interest rate is the main tool of central banks to fight inflation. Theoretically, by increasing the cost of borrowing, the demand will decrease and it will stop the further increase in prices. The yield on the 10-year U.S. government bond, which underpins borrowing costs around the world, rose 2.36 percentage points this year, its biggest annual increase since 1962. In turn, borrowing rates on mortgages, corporate bonds and other debt also increased.

Higher costs mean lower profits for companies, which ultimately causes their prices to fall in the stock market. This issue was well demonstrated in the case of technology companies whose growth depended on low interest rates. For example, in 2022 the Nasdaq Composite Index, which is loaded with technology stocks, is down 33.1%.

As stock market investors lost money and households faced inflationary bubble costs, other high-risk markets such as bitcoin and meme stocks, whose share prices were boosted during the coronavirus pandemic by a new generation of amateur investors, It decreased during the year.

Tesla, which is popular among the same type of investors, has fallen 65 percent this year, its worst performance since the company went public in 2010 and the second year the company’s stock has fallen.

But unlike inflation, the US economy remained resilient. While Europe faced an energy crisis to some extent and emerging markets such as Sri Lanka and Pakistan faltered. The relative strength of the United States makes it a safe place to invest, and the flow of cash strengthens the value of the dollar. In the year that ends today, the value of the dollar exceeded the euro for the first time in two decades.

The changing and sudden events made investors think that the worst part was over, and then in July, the financial reports of the companies improved and the stock market got better. For example, the S&P 500 rose 17.4% between June and August.

For the Fed, rising stock prices were problematic because investors getting richer would thwart its efforts to curb inflation. But after Jerome Powell announced that interest rate hikes would continue, the stock market started to fall again and the S&P 500 hit a new record low.

A new conflict with the Federal Reserve

Investors brace for another fight with the Fed as we head into 2023 Policymakers also raised their forecasts for a rate hike in 2023. There are signs of easing inflation and some suggest the central bank will hold off on raising rates earlier than it has indicated to allow the effects of the current high interest rates to play out on the economy.

Corporate profits are also expected to decline sharply in early 2023 as long-term inflation and rising interest rates begin to hit corporate profits. This could mean a further fall in the stock market.
Bank analysts don’t expect the S&P 500 to recover lost ground in 2023, while most expect the market to return to roughly where it started.

“Given what’s happened over the past 12 months, we should all be ready for another big surprise, whether it’s from inflation or Fed policy,” said Doug Porter, chief economist at BMO Financial Group.