debtfinancial market The most nasty surprises often come when things we take for granted, such as rising tulip bulb prices, the functioning of banks, and life without lockdowns, are suddenly questioned. MeInvestor 2022 was a rough time. But given the reversal of so many trends over the course of the year, the really surprising thing is that it wasn’t all that nasty. Here was the most important reversal.
cheap money end
Future financial historians will look back at the 2010s and be amazed that people really thought interest rates would stay near zero forever. Even in 2021, prominent investment firms were publishing articles with titles such as “Zero: Why Interest Rates Are Staying Low.” Borrowing costs have been declining for decades. The combination of the global financial crisis of 2007-2009 and the covid-19 pandemic seemed to keep them stuck forever.
In 2022, sustained high inflation has melted the glue. The US Federal Reserve (Fed) has embarked on its fastest tightening cycle since the 1980s, raising its benchmark interest rate target range by more than 4% to he’s 4.25-4.5%. Other central banks followed suit. The market expects interest rates to stop rising in 2023, peaking between 4.5% and 5% in the UK and US and 3% to 3.5% in the Eurozone. But the chances of them collapsing back to nothing are slim. For example, the Fed Governor believes rates will end above his 5% in 2023, settling at about 2.5% in the longer term. The days of free money are over.
Death of Longbull Market
There is a saying that bull markets don’t die of old age. Killed by the Central Bank. As was the case in 2022, the long bull market that ended was older than most. From the trough after the financial crisis in 2009 to the peak at the end of 2021, he s&p The 500 Index of major US stocks is up 600%. The interruptions to the upward march, such as the sudden drop at the beginning of the pandemic, were dramatic but short-lived.
This year’s crash has proven to last.of s&p The 500 fell a quarter to its lowest point of the year in mid-October and remains down 20%. msciof world stock indices fell 20%. And equities aren’t the only asset class that’s been assaulted. Rising interest rates, rising bond returns, and the relative decline in the attractiveness of riskier assets have contributed to the decline in stock prices. The same mechanism pushed bond prices down, aligning yields with prevailing interest rates. Indexes of global, US, European and emerging market bonds compiled by data provider Bloomberg fell 16%, 12%, 18% and 15% respectively. Whether prices fall further or not, the “every bull market” has come to an end.
During the last few years of the bull market, capital was not only cheap, it seemed ubiquitous. Central bank quantitative easing (Huh) programs devised to stabilize markets during the financial crisis went too far during the pandemic. The central banks of the United States, United Kingdom, Eurozone and Japan together pumped out over $11 trillion of newly created currency, which was used to pile up “safe” assets such as government bonds and drive down yields.
This has pushed investors into the more speculative corners of the market in search of returns. These assets then skyrocketed. In the decade ending 2007, US corporations issued $100 billion a year of the riskiest high yield bonds (or “junk” bonds). In the 2010s, it averaged $270 billion. It will reach $486 billion in 2021.
This year it has dropped to three quarters. The Federal Reserve and the Bank of England have reversed their bond-buying programs.European Central Bank in preparation do the sameLiquidity is drying up, but not just from the perilous end of the bond market. Initial public offering (ipos) broke all records in 2021, raising $655 billion globally.American now ipoM&A values have also fallen, albeit less dramatically. Capital abundance turned into capital scarcity.
value beats growth
The bull market has been a daunting time for “value” investors looking for stocks that are undervalued relative to their underlying earnings and assets.low interest rates and HuhTaking risks has made this cautious approach completely obsolete. Instead, “growth” stocks that promise explosive future earnings at high prices relative to current (often non-existent) earnings have surged. From March 2009 to the end of 2021, msciThe Global Growth Stocks Index surged 6.4x, more than double the increase of comparable value indices.
Rising interest rates have turned the tables this year. If the interest rate is 1%, he would have to deposit $91 in his bank account today to have $100 in 10 years. If the rate is 5%, you only need a $61 putaway. The end of cheap money narrows the horizons of investors and forces them to prioritize short-term gains over long-term gains. Growth stocks are sold out. Value is back in fashion.
Crypto implosion (again)
For those who believe that cryptocurrencies are good for nothing but gambling and shady activities, ftxCrypto exchanges are arguably the face of the industry and Sam Bankman-Fried, a 30-year-old philanthropist and political donor. But in November, the company went bankrupt, wiping out about $8 billion in customer funds. American authorities are now calling it “years of massive fraud.” Bankman-Fried has been arrested and is facing criminal charges. If his conviction is met, he could spend the rest of his life in prison.
ftx‘s downfall marks the recent bursting of the cryptocurrency bubble. At its peak in 2021, the market value of all cryptocurrencies increased from about $800 billion at the beginning of the year to about $3 trillion. It has since fallen to about $800 billion. As with many others, the roots of the incident lie in the era of cheap and abundant money and the anything-goes spirit it created. ■
https://www.economist.com/finance-and-economics/2022/12/21/five-financial-trends-that-2022-killed 5 Financial Trends Assassinated in 2022