The stock market in 2022 has been one of the most volatile markets on record. The S&P 500 has seen a drop of close to 20% so far and the Nasdaq 100 has seen a drop of nearly 30% so far. growth stocks have also taken a beating, with many down 50-80% ytd. Many people have asked, what is causing this volatility and the recent bearish behavior of the market?
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There are many factors that have been attributed to this recent volatility. one could look at the stock market gains during covid-19 and spark the reason why the markets are simply “cooling off” for the next run. while other traders, such as michael burry the big short, say this downtrend is here to stay.
Reading: Why is the stock market so volatile
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the federal reserve
The Federal Reserve System is the central banking system of the United States. was created Dec. on January 23, 1913, with the enactment of the Federal Reserve Act, following a series of financial panics that led to a desire for central control of the monetary system to alleviate financial crises.
The Federal Reserve began to reduce its balance sheet on June 1. this is also known as quantitative adjustment, also known simply as qt. During the pandemic, the Federal Reserve implemented just the opposite, known as Quantitative Easing (QE). uses qe in emergency situations and had strong reasoning for using qe during the stock market crash of 2020 during the start of covid-19.
Quantitative easing simply means that the Federal Reserve buys long-term securities to boost the economy in bad times. increases the money supply and lowers long-term interest rates. it also makes it easier for banks to lend and for people to borrow.
now quantitative tightening means selling long-term securities and raising interest rates, which is exactly what is happening now in 2022, and is causing the stock market to “sell”. the fed is trying to implement a soft landing here, and right now, it doesn’t look so optimistic.
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what about inflation?
Another big reason the market is spiraling is that inflation rates are rising year after year. Right now, the inflation rate in the US is around 8%, which is extremely high. typically we want an average of 3% when it comes to inflation; clearly, we are well above that average.
Of course, many speculate that the rate of inflation is actually much higher than is reported, with things like used cars, gasoline, food, and household items running between 10% and 50%. Much of this has to do with situations like the war in Ukraine, supply chain issues, and many other economic factors beyond our control.
Rising interest rates should reduce the rate of inflation, since higher interest rates often influence consumers to spend less and save more. Basically, the Federal Reserve is doing everything it can to keep inflation from getting out of control.
another important factor of market volatility is the current war in ukraine. markets don’t like the unknown, and they certainly don’t like volatility, both of which increase during these conflicts. If this war escalated beyond Ukraine, we would see a lot more volatility in the stock market.
These geopolitical issues are also a major reason why gas prices are soaring to their highest level since 2008. Speaking of 2008, our last massive stock market crash was during the 2008 financial crisis. The 2008 financial crisis, or the global financial crisis, was a severe global economic crisis that occurred in the early 21st century. it was the most severe financial crisis since the great depression.
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Will 2022 be as bad as 2008?
This is a topic that many financial experts have been debating for the last few months. Every stock market crash is different and unique, however, typically when everyone expects the stock market to crash, it usually doesn’t happen.
2008 was a unique time that was the result of too many subprime loans being given to anyone who applied. 2022 is the result of too much quantitative easing in 2020-2021, which led to high inflation, combined with the geopolitical problems in Eastern Europe. can the federal reserve have a soft landing? That’s the million dollar question in all of this.
should i buy the dip?
Unfortunately, we cannot answer that question. however, a famous investment quote has calmed many investors in turbulent times, “when in doubt, walk away.” If you have a long-term investment perspective, this recent volatility should not bother you in any way. Many famous investors, like Warren Buffet, are buying stocks at a faster rate than normal.
The US economy is doing quite well, which is why the Federal Reserve is so confident that it can start quantitative tightening now. we have survived the financial crisis of 2008 and the covid-19 crash of 2020, so we will survive 2022.
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