For two years, the stock market had been ignoring the realities of life for Americans during the pandemic – rising cases of coronavirus, loss of lives and livelihoods, lockdowns. Actually, due to positive policies, it remained bullish.
Now investors can bid goodbye to such situations.
In 2022, interest rates are projected to rise by the Federal Reserve to counter inflation and government programs launched to boost the economy may end. According to analysts, due to these policy changes, the behavior of investors, businesses and consumers will change and this will lead to some weakness in the stock market.
Investors may be wary of Fed’s decisions
David Showell, chief investment officer at Family Management Corp., a New York-based wealth management firm, said: “This is the first time in almost two years that the Fed’s small decisions can force investors or consumers to be a little wary. “
At the end of the year, Wall Street had the stance that 2022 could be very difficult. In a recent note, analysts at JP Morgan said they expect inflation to “normalise” in the coming few months and an increase in the Omicron variant is unlikely to dampen economic growth. Inflation currently stands at 6.8 per cent.
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S&P touched closing high 70 times in 2021
The S&P 500 stock index saw a good rally in 2021, gaining over 25 per cent and more importantly, gaining 16 per cent in the first year of the pandemic. An analyst at S&P Dow Jones Indices said the index touched 70 new closing highs in 2021, the second year since 1995. In 1995, the index touched closing highs 77 times. Wall Street remains bullish on China’s business prospects despite US tensions.
400 companies raised $142.5 billion
The past year was also very reliable with new stock offerings and in 2021, about 400 private companies raised $ 142.5 billion. However, investors sold off the newly listed stocks on the New York Stock Exchange or Nasdaq at the end of the year. The Renaissance IPO exchange-traded fund, which tracks initial public offerings, declined nearly 9 per cent in the year.
“The market trend is that inflation is short-lived,” said Harry Mamsky, a professor at Columbia Business School. If it is not and the Fed needs to come forward and raise interest rates to control inflation.” And the Fed has only indicated to move in this direction in 2022.
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This will be the effect of increase in interest rates
When interest rates rise, debt becomes more expensive for both consumers and companies. This could hit companies’ profit margins and make stocks less attractive to investors, while reducing consumer demand because paying more for mortgages and other debt leaves them with less money to spend. As a result, the stock market weakens and demand falls, thereby controlling inflation.
“This situation is like a nightmare: Fed tightens up and it doesn’t help,” said Aaron Brown, former risk manager at AQR Capital Management. Brown manages his money and teaches math at New York University’s Courant Institute of Mathematical Sciences. Brown said that the situation could worsen if the Fed does not make arrangements for a “soft landing” for the economy.
He said the Fed could take “very aggressive steps like a 15 percent rate hike, or wage and price controls” as it did in the 70s.
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The beginning of 2022 may be unusual
Sal Arnak, partner and co-founder of Themis Trading, said she expects an “unusual” start to 2022. Arnak said, “China and Taiwan, Russia and Ukraine – if something happens there or if the Fed surprises vigorously, there could be some selling. Even bitcoin may see some movement, but then people can start selling on their Apple and Google.”
This article by Coral Murphy Marcoz and Emily Flitters originally appeared in The New York Times.
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