The year 2022 is now over and no one is happier about that than American stock brokers. This is because the year 2002 was the worst for U.S. stock markets since 2008, with the Dow Jones, NASDAQ and S&P all ending with huge losses.
On the last day of trading for the year 2022, the Dow Jones Industrial Average ended down another 73.55 points, or 0.22%, and closed at 33,147.25 for the year’s end. The Dow Jones finished 2021 at 36,338.30. This represents almost a 10% drop in value year to year. To put this in perspective, the loss equals more than 3 trillion U.S. Dollars in paper wealth.
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The S&P 500 lost another 0.25% on its last day of trading for 2022, ending the year at 3,839.50. The S&P finished 2021 at 4,273.41, so the index lost 19.33% for the year. In contrast, the S&P gained 26.89% in 2021.
Of the big three indices, the Nasdaq Composite was the biggest loser and ended its final day of trading down another 0.11%, ending the year at 10,466.88. This was a -33.03% drop from its end of 2021 finish of 15,644.97. In 2021 the NASDAQ jumped 21.39% in value.
So, what caused the turmoil in world markets that also led to massive layoffs just about everywhere and many canceled IPOS?
Well, first there was the spike in inflation felt the world over as economies came out of the Covid shutdowns with new demands exceeding the ability of supply chains to catch up. Then came the Russian invasion of Ukraine in March.
That led to sanctions imposed by both the EU and the U.S. on Russia and Russian oligarchs. As a result, billions in potential capital were frozen and goods from Russia and Ukraine could not be exported, driving up prices. Also, there were embargos on Russian oil and natural gas which helped cause gasoline prices at the pump to skyrocket, further fueling inflation.
As Art Cashin, director of floor operations for UBS, told CNBC, “We’ve had everything from Covid problems in China to the invasion of Ukraine. They’ve all been very serious. But for investors, it is what the Fed is doing.”
Well, central banks had no choice but to fight inflation by raising interest rates. Both Israel and the Bank of and the U.S. Federal Reserve did so considerably. This is done to tighten up the money supply. It also makes it harder to borrow money and expand businesses, which, in turn, causes contractions.
Also, the bond and stock markets are negatively correlated. This means when interest rates go up, bonds, especially U.S. bonds, give greater yields and are always a safer investment. This leads to people putting their money in safer bonds or closed bank accounts with compound interest rather than in the markets. This, in turn, causes stocks to drop in value with lower demand so more people sell their stocks and move the money into other investments.
So, the final answer as to why the markets tumbled in 2022 is – “Its supply and demand stupid.”
