The current market situation
There has been news around that we are in the midst of another market crash. Have you been wondering what has been happening around the markets? Is it because of the lockdown during COVID or due to the Russia-Ukraine crisis?
An investor's assessment of how increasing prices and the potential of strict monetary policy will affect economic development, has caused US stocks to register their largest daily declines in nearly two years. A rise in the demand for safe-haven assets, such as the dollar and US Treasury bonds, boosted their value.
In spite of the S&P 500's longest weekly decline since 2011, risk sentiment is still shaky as the Fed raises interest rates, Russia and China wage war in Ukraine, and the Covid lockdowns in China continue. After the COVID-19 pandemic, emergency measures implemented to help stabilize the economy lifted the S&P 500 by 114% from its March 2020 low. To halt the downward trend that had begun in early 2021, Fed members intend to tighten monetary policy at a faster pace than predicted by the end of the year 2022. Even though rates have already risen by 75 basis points so far this year, the market is prepared for additional increases.
It has been the worst start to the year for the US stock market since the global financial crisis in 2009. A 5.3% drop in the S&P 500 index was the largest monthly drop since the coronavirus epidemic began in March 2020. The market is expected to incur a loss of approx. 47% and it will take 24 months to recover. Wondering why this has been happening ?
Reasons behind the crash
What was it that caused the stock market to plummet? There are three main causes behind this, according to the experts:
- The Federal Reserve’s plans to raise interest rates
- Slowing corporate earnings
- Mounting geopolitical tensions
With inflation already at its highest level in four decades, the Federal Reserve has promised to raise interest rates this year. However, it appears that investors have been terrified by the prospect of increasing interest rates for two reasons:
- An economic downturn in the United States is possible if interest rates rise.
- Additionally, they could make other investments, such as bonds, more attractive to investors.
Borrowing costs tend to rise when the Federal Reserve raises its benchmark interest rate. There is a decrease in consumer spending and demand due to the rise in the cost of credit cards, loans, mortgages, and other debt. Businesses, as a result, must pay more to remain open. Overall, this has a negative impact on firm profits and investor interest in their stock.
Slowing corporate earnings
There are indications that the economy is entering a more severe downturn. The latest retail managers' poll shows that activity in the service industries in the United States has plummeted to an 18-month low. Retail sales in the Eurozone were down 3% in December from the previous month, according to Eurostat. It is expected that the slowing economy would put additional pressure on firm profits, which have already been dragged down by growing prices.
Analysts have suggested that rising tensions between Russia and Ukraine in the second half of January had a negative impact on the technology sector and the broader economy.
Global energy costs may rise at a time when nations are already grappling with inflation if the situation persists and the West lays painful economic sanctions on Russia. As far as we know, oil will rise above $100 a barrel if those tankers cross the border. We'll definitely feel the impact on the European gas market as a result. The wheat market will be the first to suffer the effects of this. Helima Croft, RBC's head of global commodities strategy, said that the impact will be seen in a range of markets.
Russian military crossing the Ukrainian border could produce a huge risk-off* event, which could lead to lower stock prices and a rise in commodity prices. It's too early to be bullish, said Morgan Stanley's Michael Wilson, warning that the S&P 500 might fall another 10%. "Most pessimistic" on consumer goods, fashion, and housing-related stocks that have benefited from rising prices, Wilson said in an interview.
However, not everyone is pessimistic about the short-term performance of the stock market. Stock prices have fallen this year, but UBS Private Wealth Management managing director Frank Panayotou believes that this is a buying opportunity for long-term investors because it "looks overdone." Investors must be prepared for more volatility and lower equity market returns than we have become accustomed to in recent years, he said. Stock market volatility and geopolitical tensions tend to favor safe-haven assets like gold and other precious metals, so this may be a possibility.