Will the Stock Market Crash Again in 2021
The Fed'south Moves Pumped Up Stocks. In 2022, It May Pull the Plug.
Shares soared as interest rates stayed low and stimulus programs helped the economy. But expected changes could make investors wary.
Credit... Shira Inbar
For two years, the stock market has been largely able to ignore the lived reality of Americans during the pandemic — the mounting coronavirus cases, the loss of lives and livelihoods, the lockdowns — because of underlying policies that kept it buoyant.
Investors can now say goodbye to all that.
Come up 2022, the Federal Reserve is expected to raise interest rates to fight aggrandizement, and government programs meant to stimulate the economy during the pandemic will have ended. Those policy changes will cause investors, businesses and consumers to behave differently, and their actions volition eventually have some air out of the stock marketplace, according to analysts.
"Information technology's going to be the first time in most two years that the Fed's incremental decisions might strength investors or consumers to go a piffling more wary," said David Schawel, the chief investment officeholder at Family Management Corporation, a wealth direction firm in New York.
At year's end, the overarching view on Wall Street is that 2022 volition be a bumpier ride, if not quite a roller coaster. In a recent note, analysts at J.P. Morgan said that they expected inflation — currently at vi.8 per centum — to "normalize" in coming months, and that the surge of the Omicron variant of the coronavirus was unlikely to lower economic growth.
LPL Financial, a brokerage, had a similar accept, saying interest rates will move "modestly higher" in 2022.
The Southward&P 500 stock index had a keen run in 2021, rising more than 25 pct — on top of its 16 per centum gain during the kickoff year of the pandemic. The index striking 70 new endmost highs in 2021, second only to 1995, when there were 77, said Howard Silverblatt, an analyst at South&P Dow Jones Indices. Shares on Friday fell slightly.
The market connected to rise through political, social and economical tensions: On Jan. 7, the day after a pro-Trump mob stormed the U.South. Capitol, the S&P set another record. Millions of amateur investors, stuck at home during the pandemic, piled into the stock market place, too, buying up shares of all kinds of companies — fifty-fifty those that no one expects will earn coin, like the video game retailer GameStop.
Wall Street besides remained bullish on business prospects in China despite Beijing'due south growing tension with the United States and tightening grip on Chinese companies. Waves of coronavirus variants, from Delta to Omicron, and a global death toll that crossed five meg did non deter the stock marketplace'south rise; its recovery afterwards each bout of panic was faster than the previous one.
"2021 was a terrific year for the equity markets," said Anu Gaggar, the global investment strategist for Democracy Financial Network, in an emailed note. "Between federal stimulus keeping the economy going, piece of cake monetary policy from the Fed keeping markets liquid and interest rates depression, and the ongoing medical improvement leading to surprising growth, markets have been in the best of all possible worlds."
The past year also seemed promising at first for new stock offerings, and about 400 private companies raised $142.5 billion in 2021. But investors had sold off many of the newly listed stocks on the New York Stock Exchange or Nasdaq past the cease of the year. The Renaissance IPO exchange-traded fund, which tracks initial public offerings, is down about 9 percent for the year.
Shares of Oatly, which makes an oat-based culling to dairy milk, soared 30 percent when the visitor went public in May but are now trading threescore percent lower than their opening-mean solar day closing cost. The stock-trading starting time-up Robinhood and the dating app Bumble, two other large public debuts, were down about l percentage for 2021.
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The first sign that the stock market could terminate its recent bull run appeared in the second half of 2021 when prices of household goods, gasoline and much more began to ascension, sparked by supply chain disruptions stemming from the pandemic. Prices for used cars skyrocketed amid a global computer bit shortage. Every bit Covid-19 vaccination rates improved, businesses trying to reopen had to raise wages to attract and retain employees. Consumer prices climbed five.vii percent in November from a year before — the fastest footstep since 1982.
But even when "aggrandizement" had go a buzzword worthy of a headline in The Onion, the stock market appeared ho-hum to react to price increases.
"The market is on the side that aggrandizement is transitory," said Harry Mamaysky, a professor at Columbia Business School. "If information technology'south not and the Fed needs to go in and enhance involvement rates to tame inflation, then things could get a lot worse in terms of markets and economic growth."
And that is what the Fed has signaled information technology will exercise in 2022.
When interest rates become upwards, borrowing becomes more expensive for both consumers and companies. That tin can injure profit margins for companies and make stocks less attractive to investors, while sapping consumer demand because people accept less money to spend if their mortgage and other loan payments go upwards. Over fourth dimension, that tends to debunk the stock market and reduce demand, which brings inflation back nether command.
"I expect 2022 to be a bumpier ride because the returns are not going to come as easy as they did in 2021 or most of 2020," said Greg McBride, an analyst at Bankrate, a personal finance company. "Even if the economy continues to grow, at that place will be concerns about valuations as the Fed tightens policy, and that volition lead to some heightened volatility."
Higher involvement rates could also dampen investor enthusiasm for stocks because bonds would pay a college render than they accept in recent years. In fact, LPL Financial forecast that the yield on the x-year Treasury notation, one of the most widely tracked government bonds, volition rise to betwixt one.75 percent to two percent past the cease of 2022.
Mr. McBride said the values of many stocks were being supported by extremely low yields on Treasury bonds, especially the 10-twelvemonth yield, which has held to nearly one.v percent.
"If that yield moves upwardly, investors are going to re-evaluate how much they're willing to pay for per dollar of earnings for stocks," he said. Even if corporate profits — which were strong in 2021 — continue to grow in 2022, he added, they are unlikely to expand "at a footstep that continues to justify the current toll of stocks."
Paradigm
Notwithstanding, what ultimately happens to the stock market in 2022 depends on whether the Fed's plans to cut inflation past gently tightening monetary policy piece of work as intended.
In addition to an expected charge per unit increment, the Fed is winding down a pandemic-era programme that was meant to provide a backstop to the marketplace. In the spring of 2020, the Fed started ownership bonds to inject actress cash into the financial system and help companies stay adrift during severe drop-offs in their businesses. The Fed announced in Dec that it would quicken the footstep of pulling back on that aid, fix to finish in March.
"The nightmare scenario is: The Fed tightens and it doesn't help," said Aaron Dark-brown, a sometime hazard manager of AQR Capital Management who at present manages his own money and teaches math at New York Academy's Courant Found of Mathematical Sciences. Mr. Brown said that if the Fed could not orchestrate a "soft landing" for the economy, things could start to get ugly — fast.
And then, he said, the Fed may take to take "very aggressive activity like a rate hike to 15 percent, or wage and toll controls, like we tried in the '70s."
By an equal measure, the Fed's moves, fifty-fifty if they are moderate, could also crusade a sell-off in stocks, corporate bonds and other riskier assets, if investors panic when they realize that the free money that drove their hazard-taking to ever greater extremes over the past several years is definitely going abroad.
Sal Arnuk, a partner and co-founder of Themis Trading, said he expected 2022 to begin with something similar "a hiccup."
"China and Taiwan, Russian federation and Ukraine — if something happens there or if the Fed surprises anybody with the speed of the taper, there'due south going to be some selling," Mr. Arnuk said. "It could even start in Bitcoin, but then people are going to outset selling their Apple tree, their Google."
Source: https://www.nytimes.com/2021/12/31/business/stock-market-2022.html
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