Investors entered 2022 with high expectations for the stock market. After all, the stock market had enjoyed sustained growth throughout 2021. Some industries like tech, media, and communications saw unprecedented growth since 2019, despite the 2020 stock market crash hiccup.
The Stock Market in 2022 So Far
Unfortunately, 2022 has proven anything but easy for the stock market. The year hasn’t been kind to the stock market, causing investors and traders to notice. The market began the year positively, but then things worsened quickly.
Then, numerous events had a domino effect on the market, sending it cascading down. The Ukrainian-Russian conflict, for instance, had a devastating effect on stock markets worldwide. Unfortunately, the implications of the invasion wouldn’t stop there. Problems began to compound as the invasion caused supply chain issues and spiked oil prices. These problems began affecting companies that didn’t have direct exposure to Russian or Ukrainian markets. Rising oil prices meant transportation costs and office expenses would skyrocket, particularly for companies within the manufacturing sector. In addition, supply chain issues meant many companies had to devise alternatives to receive raw materials and finished goods.
Furthermore, the invasion also contributed to rising inflation. Inflation would continue rising until it became a significant problem - reaching an all-time US high in nearly 40 years. The situation necessitated action, prompting the Federal Reserve to act. The Federal Reserve made the necessary adjustments by increasing interest rates twice within a quarter, hoping to quell rising inflation rates, if not control them. Unfortunately, raising the interest rates also sent seismic shockwaves through financial markets. Investor sentiment dampened. Today, the stock market is in a disastrous situation. The SP 500 Index, for instance, has declined by over 20 percent since the year started. The NASDAQ Composite - a technology-related stocks index - has fallen by nearly 35 percent. Most investors and traders generally consider blue-chip stocks to be the most reliable. However, they haven’t fared any better, falling by nearly 18 percent.
The Tech Bubble Bursts
2022 was also the year that caused the tech stock bubble to burst. Most thought that while some tech stocks might depreciate, the tech giants would remain safe. However, that hasn’t proven to be the case. The five biggest tech companies have shed nearly $2.6 billion since the year started, representing a 26 percent decline. That’s twice as much as the Dow Jones Industrial Average drop that has investors and traders in a frenzy. Some tech giants like Amazon have already taken measures to avoid the brunt force of the bubble burst. Amazon shareholders approved plans for a stock split in March. The company is no stranger to stock splits. It has seen four stock splits in its history. However, Amazon’s latest stock split followed after a twenty-year gap. The company’s stock split took effect on June 6th, 2022. The 20-to-1 stock split lowered the company’s stock price from over $2,000 to slightly above $100. It’s a move that Amazon believes will pay great dividends because it makes the company’s stock more accessible to retail investors - something the company needs to help it steer through this troubled market.
While the tech giants will likely survive this market unscathed, the same is unlikely for high-growth tech companies. These companies had highly-stretched valuations, with some trading at multiples fifty or eighty times their revenue. These companies have started to feel the effects of the troubled stock market. Zoom, for instance, is now trading at less than six times this year’s expected sales. It’s a stark departure from the company’s 85 times multiple in 2020 when it peaked.
Investors are also phasing out revenue multiples. Instead, they search for other financial metrics that can help assess a company’s sustainability.
The State of the Energy Sector
The energy sector has been one of the few to perform well during these challenging times. The Vanguard Index Fund has risen by nearly 30 percent despite mass sell-offs recently. Individual stocks have also performed well. Companies like Matador resources and Ranger Oil have grown this year. Oil giant Exxon Mobil has also had an exceptional year. The company’s stock gained nearly 75 percent this year - a figure that would put most growth stocks to shame.
It’s no secret that while rising oil prices might have affected organizations and consumers, it has benefitted oil companies. Most oil companies are profitable at $40 to $60 a barrel. However, the increasing oil prices have surged to nearly $120 a barrel, making this year extremely profitable.
Reasons to Feel Cautious About the Stock Market in 2022
Here are some reasons to feel cautious about the stock market in 2022. They include:
Experts remain conflicted about how high inflation rates will affect the stock market and the US economy for the rest of the year. Some experts argue that the market will correct itself eventually, particularly since the Federal Reserve changed the interest rates to counteract inflation. However, others are not so hopeful. Some experts believe that the Federal Reserve increasing interest rates twice within a quarter isn’t a good sign. Experts and analysts are split into two camps, and both have reasonable arguments about how the rest of the year could pan out for the stock market.
Rising Interest Rates
As previously stated, rising interest rates have sent traders and investors into a frenzy, sparking uncertainty. The interest rate hike could slow down inflation. However, it could also trigger another recession. It’s only natural that a recession would cause the stock market to go tumbling down.
The Ukrainian conflict sent shockwaves through the world when it happened. The news event caused stock markets worldwide to spiral down. In addition, it also marked one of the most significant stock market crashes when the Moscow stock exchange lost more than a third of its value overnight.
The conflict, however, has also had other implications. It has disrupted supply chains, affecting companies that weren’t directly exposed to the Ukrainian and Russian markets. In addition, it has also caused oil prices to rise, creating complications for industries.
Reasons to be Optimistic About the Stock Market in 2022
Here are some reasons to be optimistic about the stock market’s fate in 2022. They include:
COVID-19 remains at large. However, it’s not as large a problem as it was in 2020. Declining rates and a milder COVID variant have made things more bearable for the economy.
Continuing from the point previously discussed, the global pandemic also wreaked havoc on economies, resulting in unemployment rates skyrocketing. The good news is that unemployment is now under control in the United States. April 2022 marked the lowest month of unemployment since February 2020 - before the pandemic started. This news will relieve many investors and traders because it shows that people are looking for and attaining jobs. Such conditions generally occur when the economy is gaining ground.
New Industries Growing
The pandemic might have disrupted some industries like retail, airlines, tourism, etc. However, it also facilitated the rise of other sectors. E-Commerce, tech, and biotech gained significant ground during the pandemic. While the tech sector isn’t doing so hot right now, the other sectors are faring better. In addition, established sectors like pharmaceuticals and healthcare also benefitted from the pandemic. These sectors will likely continue to see growth until COVID-19 numbers become minimal.
Low Consumer Confidence
It’s no secret that the market conditions and economic downturn have also affected consumer confidence. There’s a noticeable gap between consumers’ expectations for the future and their assessment of the current situation. Generally, such disparity between these two is only observable during lead-ins to recessions. Consumers are facing challenging times with rising inflation, higher interest rates, and surging mortgage and rental costs. These factors have effectively eroded consumer spending power. However, it has also led to a more pressing problem. While consumer demand has plummeted due to decreasing spending power, another issue is that consumer saving rates have also declined. Research shows personal savings rate has collapsed to 4.4 percent, the lowest since September 2008. In addition, borrowing has risen, meaning many consumers rely on credit to get through these difficult times because they’ve exhausted their savings.
This revelation spells trouble for the stock market. Organizations have already witnessed declining revenues that have contributed to falling stock prices. However, it has also opened another can of worms. Organizations have realized they’re overstocking their goods and hiring too many employees because consumer demand doesn’t support these initiatives. The situation is unlikely to remedy itself in 2022.
Experts believe the decrease in consumer spending will continue for the rest of the year because of declining real incomes, slowing wage growth, tighter lending standards, and lower savings rates.
What Happens Next?
The year’s halfway done, and the stock market has already taken a brutal pounding. If this were a boxing contest, the referee would be standing over the stock market and waving his hands in the air, declaring that the stock market couldn’t continue. Fortunately, the stock market is resilient. After all, financial markets are well-known for being inherently volatile. If the stock market were to crash, it would also rebound eventually. It always has.
If you’ve read so far along, you’ll know that experts and economists alike are baffled by market trends. Uncertainty is at an all-time high. There have been growing murmurs of an upcoming recession. Many CEOs of high-profile organizations have already warned consumers and policymakers about the state of economic affairs. Economists and Wall Street analysts have already declared that a recession is underway and is likely to arrive in 2023.
However, the reality is that these speculations are still unfounded. The stock market and the economy’s performance in the remainder of the year could impact these predictions.
Many traders and investors might be tempted to capitalize on the current stock market price fluctuations. However, experts and analysts warn against it. Many growth stocks - valued on revenue growth instead of earnings - have already declined by 80 percent or more this year.
Refraining from investing in the market until the results from the second quarter arrive is likely a good idea. It’ll help traders and investors determine the market’s standing and give more basis to claims about an upcoming recession or stock market rally.
A Glimmer of Hope
You already know that markets have cyclical periods. Sometimes, markets will be bearish, others bullish. The good news is that most bear markets are generally short-lived. The quicker a market enters the bearish territory, the shorter the bearish period. Generally, most bear markets don’t last for more than nine to fifteen months. Let’s use the last known bear market to assuage your fears. The stock market entered the bearish territory following the outbreak of the COVID-19 pandemic in early 2020. Fortunately, the market was only bearish for a mere 33 days.
The stock market is currently bearish by most metrics. Whether you classify it as bearish or not is semantics. However, economists unanimously agree that the market is dangerously close to bearish territory. The good news is that most bearish markets don’t last for more than nine to fifteen months. The stock market has already seen nearly three months of bearish sentiment, meaning it will likely bounce back by the year’s end. Alternatively, it might take a little longer, but the stock market will return to normal bullish sentiment in 2023.
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