Good Riddance to 2022 !
The number 2022 has three twos in it, but you might think that with what happened last year it had the curse of three sixes. The list is long: High inflation, rising interest rates, continuing difficulties with Covid, disasters with flight cancellations, high energy prices, and stock and bond markets falling are all enough to make us wish we had taken a long nap – or maybe hired an exorcist.
Indeed, the stock market as measured by the S&P 500 dropped more than 19%. This sounds bad, but in a typical recession the stock market will drop around 30% before bouncing back. Tech stocks such as Microsoft and Google certainly contributed to this drop with the tech sector dropping a miserable 31%. What we may forget is that just the year before, however, in 2021, tech stocks climbed 29%.
If stock performance during 2022 was not bad enough, fixed-income bond markets dropped the most in history. That’s right. One financial history expert said that in going back 250 years we’ve never seen a drop like this. Fixed-income, as measured by the intermediate term bond index, dropped 15.2%. Yes, that’s not nearly as much as some stocks, so it still gives us reassurance that fixed income is more stable. Remember, this decline is not caused by the lack of quality of the investment, only the mathematical relationship with market interest rates, and as interest rates stabilize and settle back down, these values will recover. In the meantime, the steady income from these securities remains the same, which also reduces the dip amount.
Year of the Federal Reserve3>
Fixed income securities dropped because the Fed was relentless in its record seven increases during the year to elevate interest rates as it fought inflation. As I’ve said in this space before, our federal government flushed in about $5 trillion to offset the effects of the Covid slow down. We may have had a good Covid recovery and relative stability, but the extra cash spending combined with supply problems combined to increase prices. Rising energy prices related to global instability was an additional reason.
I believe another factor affecting the stock market last year, and in the last several years, has been active retail traders. That is, a new generation of investors has easy access to stock trading platforms and are able to buy, buy, buy, and sell, sell, sell, on a whim. When they loved Tesla stock, the price went up 49% in 2021. However, now they hate the company, and the stock price has dropped 65% in the last 12 months.