Jan 6, 2022
After a gruesome 2021 stock market, many investors started the new year with renewed optimism. We don’t have people shouting “to the moon” like in the cryptocurrency market, but it seems stock prices are going to rise this year in the hearts of all.
January is here, but as the saying goes, the more things change, the more they remain the same. With the exemptions of a few stocks, the entire market has resumed taking a beating. Unlike last year, the reason for the stock market’s down trajectory is not because of meme stocks or cryptocurrency hype. It is the government behind the recent dip.
Let us clarify what is going on before you say, “I always knew the government is bad.”
The coronavirus brought some economic restraint and propelled the government to spend on different forms of stimulus. As many believed, these monies were not printed from thin air or by the government, adding zeros behind figures. Instead, the government can issue these monies by buying bonds. In a term called Open Market Operations, the government can increase the supply of money and reduce interest rates in the open market by buying bonds with cash. During the Covid period, the government bought as many bonds as they could lay hands on, both good bonds and junk bonds. That is some trillions that could be shared amongst the public. These monies are supposed to be used for buying and investing, hence, restarting the economy.
With so much cash in the market, the risk of inflation is very high. The Fed chairman once dismissed inflation as transitory, but as time passed, it became glaring that inflation was here to stay if nothing was done.
The solution was either to raise interest rates or to sell the bonds it bought in 2020 and 2021 to reduce the flow of money in the economy. The Feds have indicated they are unwilling to raise interest rates, and the only feasible option is to sell the bonds to the open market.
The relationship between the interest rates and stock price is direct. When interest rates are high or raised, businesses and individuals become conservative in their spending; hence, businesses’ earnings drop, and so do their stock prices (Invariably sending the stock market down in the short-term). The opposite is true when the interest rates are low or dropped.
Investors are wary of the Fed’s measures to reduce inflation, hence the price dip in the market. The stock futures are still steady, so there is hope 2022 will still be the year we see ‘to the moon.’ The Omicron variant cannot hinder the market’s recovery, and staying in the market might finally pay off.
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