Covid-19 continues to complicate global economic recovery. After almost 2 years of the pandemic, there is still no end in sight for where the ‘new world’ is heading.
In the stock market, however, things were far less bleak than others could have imagined. In 2021 the S&P 500 was up more than 27% and the FTSE 100 was up just under 15%. Something not many would have expected with rising global inflation and hints of interest rate hikes.
There are now questions surrounding how long this bull run can continue. Here are our top trends to help you approach this year.
Stock markets do well when central banks keep interest rates low. But the Federal Reserve is expected to raise rates twice this year, with the first likely to be as early as March in the face of “alarmingly high inflation”, according to a senior US central bank official.
The Bank of England raised rates for the first time in 3 years last month from 0.1% to 0.25% after the Consumer Price Index CPI, which is a measure of inflation, rose by 5.1% in 2021. One of the largest increases in the last 20 years.
Why do interest rates matter to the stock market? Interest rates are key to the stock market as it gives investors a better insight on where to put their money. When interest rates are higher, the rates received on fixed interest investments such as bonds are also higher as they are linked. So, when this happens, investors move their money from the stock market and invest it into other investments such as bonds, due to the safer nature of the investment and the higher return they will receive compared to when the interest rates were lower. This lack of new investment provides less liquidity in the stock market and thus puts a strain on its growth.
Perhaps the biggest uncertainty of 2022 is the midterm Congressional elections in the US. Republicans are likely to do well, as the sitting president’s party usually loses seats in the midterms. Still, the fight seems poised to be very biased, which might lead to unpredictable news, instability or even violence. That’s the kind of surprise that can spook investors.
It’s also not new. The run-up to midterms often roils stocks, particularly when a power shift in Washington is anticipated. An analysis by Green Bush Financial of stock returns in 1994, 2006, and 2010—the last three times Congressional bodies switched parties—provides a clear warning.
“In all three of those years where a shift in power was in the cards, the stock market was either down or flat leading up the midterm elections in November,” the analysis found. All is not lost, however. All three years, the market churned higher after the election.
Stock markets are likely to remain sensitive to the spread of new Covid variants for some time yet. And it's something that's rightly on investors' minds. Even the possibility of a lockdown is enough for markets to react. And some sectors are affected more than others.
The Airline industry was heavily impacted by lockdowns in 2020. And any chance of further restrictions won't be welcomed news. The large costs that come with operating an airline means if planes are grounded, bills still need to be paid. Groups can release staff and negotiate rental payments, but we've seen before that's not enough to stop the losses from mounting up. Airlines also pay in advance for oil contracts to guarantee a certain price. When fleets are grounded, those contracts become useless as airlines need less fuel. But those contracts don't just disappear. If airlines aren't taking up the contracts, the charges can stack up.
E-commerce saw a boost during previous lockdowns, and online shopping rose to record highs. Over the last few years, we've seen an increase in online spending as we were forced to adapt to new ways of living. It's a trend that was in place already but has been accelerated by the pandemic.
Another round of lockdowns, or even if fears of going to public places grow, could add fuel to the fire for online platforms.
Businesses that either operate solely online or have made good headway with their online platforms, could hold up better than bricks and mortar businesses should things get worse.
Where can I put my money in 2022?
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