2022 hasn’t been a good year for financial markets. The Ukrainian-Russian conflict started the year by sending financial markets worldwide into freefall. Since then, things haven’t improved like many experts suggested they would. Rising inflation hasn’t helped the cause either.
News broke yesterday of the Dow Jones Industrial Average Industrial tumbling below 30000 for the first time since January 2021, unnerving most investors. The stock market had initially rallied on Wednesday following Federal Reserve Chairman Jerome Powell’s suggestion that the central bank’s interest rate increase wouldn’t become common. However, optimism soon fizzled, and the stock market continued its descent.
The Dow Jones Industrial Average wasn’t the only one to decline. The SP 500 also fell by 123.22 points, and the NASDAQ Composite declined by over 453 points.
Then, there’s Bitcoin, Ethereum, and the cryptocurrency market. It continues crashing like a rock off a cliff. The cryptocurrency market has been freefalling like a skydiver without a parachute since 2022 began. Bitcoin has declined by over 55.43 percent in the past six months alone. Likewise, Ethereum - the second largest and most valuable cryptocurrency - hasn’t fared any better, declining by over 72.17 percent in the same timeframe.
Many had previously hedged their bets on these asset classes. Investors believed that if stocks did decline, crypto wouldn’t. After all, 2021 was a monumental year for cryptocurrency, and NFT and DeFi projects promised that cryptocurrency was here to stay for good.
Unfortunately, things haven’t panned out as anticipated. Let’s examine the factors that are causing stocks and cryptocurrencies to decline.
Why Stock and Crypto Prices Continue Declining
Here’s why the stock and crypto market continues declining:
Inflation has reached unprecedented levels in the United States, marking the highest inflation rates the country has seen in nearly 40 years. The Consumer Price Index - a metric used to measure inflation - rose 8.3 percent from the previous year in April. While the Federal Reserve has implemented measures to curb inflation from rising further, the policies will require time before any observable impact occurs.
Many investors are also nervous about the Federal Reserve's policy to combat inflation because it increases the likelihood of a recession. Goldman Sachs analysts estimate there’s a 38 percent chance the US economy will undergo a recession within the next 24 months.
While the Federal Reserve can control inflation without bringing a recession, it’ll require some tough policies. Investors remain worried about how aggressively the Federal Reserve will attempt to curb inflation, causing market uncertainty.
The Natural Ebb and Flow
Most experts will tell you that stocks don’t always stay at the top. Favorable stock market gains are temporary, typically lasting during bullish runs. Eventually, the market declines.
Many prominent experts today believe that most stocks and cryptocurrencies were naturally destined to decline because they experienced gains for a significant period.
The crypto industry has particularly been affected by declining investors’ confidence. Many investors don’t believe the market was as insulated or immune as they initially perceived. The crash of Luna and UST led many investors to believe the market wasn’t as safe as they had thought, prompting them to divest. The crash also forced many investors and traders to rethink whether cryptocurrencies were the future.
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