Dear readers,
We wanted to end this crazy year with our thoughts on what we all have experienced in the stock market. We hope that at the end of this story you can move past this bad investing year and focus on the next opportunities that will present us in 2023.
2022 was a rough year being a investor, we believe we can all agree on that. Trillions worth of investments got wiped out of investable assets, not even bond and gold investors were safe this time. The classic 60/40 portfolio strategy (60% stocks & 40% bonds) had its worst performance in the past decades and cash in the bank lost purchasing power due through inflation.
Central Banks Big Mistake
We believe the Federal Reserve made a big mistake in 2020. Did the Fed really not think about the risk of injecting trillions of dollars into the market and sending free stimulus bills to every citizen would not result in inflation?
The Federal Reserve printed approximately $3.3 trillion in 2020 alone, which, according to City AM, equates to one-fifth of all US dollars in circulation in the same year.
The disturbing thing is… The Fed continued printing $ until the mid of 2021 when inflation was already a lot higher than their yearly 2% inflation target. Not only did the Fed this, other central banks all over the world did exactly the same thing!
This caused the circulation of money to accelerate, which caused inflation to rise rapidly. Of course were there other circumstances that brought inflation to almost 10% in the US. Like the war in Ukraine which caused the price of oil to increase and global supply bottlenecks.
With everything added up, the Federal Reserve, which is the leading/importantst central bank of the world right now, to dramatically shift their tone to a more hawkish side.
At the start of 2022, the Fed announced their rate hike policy (Quantitive Easing → Quantitive Tightening) to bring inflation down. This caused stocks to tank immediately.
Stocks in Freefall
When the Fed is hiking rates, interest rates are increasing on like mortgages, creditcard debt, lending and more. This causes consumers (we) to spend less because everything is becoming more expensive.
And what happens if we don’t buy stuff anymore? Companies are reporting less growth or even experience contractions in their earnings reports. This will put pressure on their stocks, which eventually will fall in price.
The tech sector experienced most of the losses this year because most tech companies are considered growth companies. Growth companies rely on investors and debt to grow. If the interest rates on debt goes through the roof (what is happening right now thanks to the Fed) companies can’t grow as fast because they can lend less, this tend to give bad sentiment towards investors who are believing that the stock will perform less in the future, so basically selling occurs and the stock goes down.
Crypto Back to Reality
If you thought investors in the tech sector had major losses this year… it is nothing compared to the losses in crypto.
The crypto space evaporated roughly 75% of its value in one year, major crypto brokers filed for bankruptcy like FTX, Voyager and Celsius and a “stable coin” was not so stable after all (Terra).
It is not hard to understand that 2022 was not a year of creating wealth. Unless you had short positions, then you had a great year.
Next Year
The Federal Reserve recently announced their forward guidance that the hiking cycle likely ends around the 5-6% Federal Funds Rate. We are now around 4.25%, so we have some pain to go through first until we hit that target.
We believe when inflation finally plummets back down, the Fed will finally return to a more neutral tone or even loosen some of its monetary policy constraints. This will eventually cause investable assets like the stock market to bottom out and perhaps rise again.
The full impact of the hiking cycle is yet to come, so prepare for an impending recession. Move out of margin and risky stocks and focus on companies that weather recessions well.
We at Patellic wish you a Merry Christmas and a Happy New Year!
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