Record Stock Market High Followed by Worst Decline Since 2008

The stock market set a record high on the first trading day of 2022 but then spent the next 12 months tumbling in the worst decline since the Great Fiscal Crisis of 2008. Stocks, bonds, and cryptocurrencies all fell, and there were few places to find shelter. On Friday, the S&P 500 Index fell 0.25% to close the year down 19.4% at 3839.50. From its all-time high of 4796.56 on January 3, the index plummeted 20%.

The Dow Jones Industrial Average declined 0.22% to close the year down 9.6% at 33147.25. The Dow also hit an all-time high the first week of the year, reaching 36799.65 on January 4. From this high, it fell by 10%.

Causes of the Stock Market Plunge

Several factors caused the market’s decline. In January, Russia invaded Ukraine, leading to wheat, fertilizer, and energy shortages in Europe. As a result, energy was the top-performing sector of the year. The Energy Select Sector SPDR ETF, which holds all energy stocks in the S&P 500, rose 66.2% in 2022.

As people emerged from Covid-19 lockdowns, they began buying in large quantities, increasing inflation. Supply chain disruptions caused by the pandemic and the Russian/Ukraine conflict also contributed to rising prices, with the Consumer Price Index reaching 9.1% in June, the highest level since November 1981. By December, the CPI had declined to 7.1%.

Inflation is often detrimental to high-growth companies, many of which are in the technology sector. In 2021, technology was one of the worst-performing sectors. The Technology Select Sector SPDR ETF, which holds all tech stocks in the S&P 500, fell 27.7% over the year. This caused the tech-heavy Nasdaq Composite Index to drop 33.1% to close the year at 10466.48. The Nasdaq also hit a record high on the first trading day of 2022, reaching 15832.80. From this high, it ended the year down 33.9%.

Federal Reserve’s Response to Inflation

To combat rising inflation, the Federal Reserve raised interest rates from 0% to a range of 4.25% to 4.5%, the highest rate in 15 years and the fastest increase since the 1980s. The Fed plans to continue raising rates in 2023. This caused the US Treasury market to record a loss in 2022. The 10-year US Treasury bond opened the year with a yield of 1.51%. After reaching a year-high of 4.33% in October, it closed the year with a yield of 3.88%. According to Bloomberg, the Bloomberg US Treasury Index returned -12.5% in 2022, its second full-year loss and the biggest in its four-decade history. The worst months for the index were September, March, and April, and the first quarter saw a loss of 5.58%, a record for a single quarter.

Federal Reserve’s Response to Inflation

Cryptocurrencies, advertised as a store of value in times of inflation similar to gold, failed to live up to expectations and were highly volatile in 2021. Bitcoin, the flagship of the crypto market, ended the year at $16,602.59, a 64.1% decline for 2022. Since reaching a record high of $67,566.83 on November 8, it has fallen 74.4%.

By Mike