Since the first week of trading in 2022, the stock market experienced swings as investors rang the market. At the same time, experts have been keeping an eye on stock volatility since late last year as the market wrestled with the Federal Reserve.
In the last two years, the stock market was able to stay afloat due to the Federal Reserve stepping in with a pandemic-era program meant to provide a backstop to the market. However, just last week, the Fed released minutes of their December 2021 policy meeting which most fear will bring about Stock Market Volatility. The minutes revealed the policymaker’s decision to raise interest rates quicker while shrinking the size of the Fed’s balance sheet as a way to fight inflation.
What Impact Will the Stock Market Have When the Fed Raises Interest Rates in 2022?
Basically, interest rates have a major impact on stock market prices all year long. However, higher interest rates are always negative for the stock market process for two reasons.
- Higher interest rates mean a lower present value of future incomes
- Higher interest rates will slow economic growth
Sometimes the stock market rises when interest rates rise. But this usually happens when the economy is strong. In other words, when the economy is growing fast, both businesses and consumers borrow more and save less thus pushing interest rates up.
However, in 2022, interest rates aren’t going up because the economy is strong but because of the Federal Reserve policy. This move is expected to have a negative impact on the stock market. Borrowing money will be more expensive, therefore, making the cost of doing business will rise for both public and private companies. Over time, the higher costs and less business will result in lower revenues and earnings for the public, who are the stock investors, inevitably impacting the stock value.
The good news is that as an investor, you can still avoid making losses when trading even if the market experiences stock market volatility. This is possible by using the Take Profit and Stop Loss features offered by most trading platforms. You should know that these two important features take on their full meaning when you want to automate transactions. Opting for Take Profit and Stop Loss turns out to be very important for people who do not have the possibility of staying glued to their screens to appreciate the variations of the market.
What Is the Stock Market Outcome So Far in January 2022?
2022 has not started on a good note for stock market investors with the Federal Reserve announcing to raise interest rates. For instance, S&P 500 is down about 4% year to date from its 27% gain in 2021. Sadly, the sell-off has been even worse for the tech-heavy Nasdaq which by the last week on Wednesday was down to 7% year-to-date, erasing a quarter (21.4%) of last year’s gain.
As for Dow Jones before the Fed’s 15-16 minutes, it has risen in the final trading days of 2021 to the first two days of 2022 by 2.4%. Unfortunately, last Monday it dipped to 0.3% in the stock market trading only to rise again to 0.51% or 183.5 points on Thursday morning. For tech companies like Alphabet, Microsoft, and Apple in 2021, they were able to surge at 65%, 52%, and 35% respectively. Nonetheless, the first week of 2022 saw a downfall of the same companies to 8%, 7%, and 4% year to date.
On the other hand, value stocks were the opposite as they beat their growth counterparts in the first week of 2022 thus extending their performance in December 2021.
Conclusion
When it comes to the stock market, 2022 has not seen its usual start of the year rally. The hawkish stance by the Fed has roiled financial markets at the start of 2022 thus bringing uncertainty to the stock market as well as the financial market as a whole.
