Well, the stock market continued its 2022 decline.
What seems to be behind this?
Interest rates are rising as the Federal Reserve seems to be intent upon fighting inflation.
“The sell-off appears to be driven by the earnings stories that are coming out,” we hear repeated more often as the past week advanced.
The picture isn’t pretty.
Investors are moving away from riskier assets. In particular, the prospect of future, higher rates of interest have hurt tech stocks and have bashed the prices of unprofitable companies.
The NASDAQ index has been driven into “corrections territory.”
One of the areas hit, of special interest, was the cryptocurrency space.
On Thursday, I wrote a post that contained an examination of how the price of cryptocurrencies was following the performance of the stock market.
Well, cryptocurrencies took a fall last week as well.
Bitcoin lost about 6.6 percent on Friday compared with its level 24 hours earlier. Its price was down a little over $5,000 for the week to below $37,000.
Ether fell by 8.9 percent on Friday.
The word is, “All risk premium assets are being impacted.”
Caitlin Ostroff writes in the Wall Street Journal:
“Cryptocurrencies are no longer an isolated risk asset and are responding to changes in global policy.”
Ms. Ostroff continues:
“One measure of how bitcoin has become more entwined with markets: The cryptocurrency is near its highest correlation with the stock market since September 2020.”
When the stock market goes up, the price of Bitcoin goes up.
And, when the stock market goes down…the price of Bitcoin goes down.
But There Is More
The international situation is not helping either.
The tensions between Russia and the United States are impacting world markets and the U.S. is not being left out.
We read in the Financial Times:
“Global equities suffered their biggest declines in more than a year…”
Yes, inflation is a concern, higher interest rates are a concern, the possible Federal Reserve tightening is a concern, but there are also other things going on around the world that can have a major impact on where the stock market might be going.
I can’t stress this point enough to investors.
Right now, we are in a state of radical uncertainty.
When really pushed, we have to admit that we really don’t know a lot of the possible outcomes that might take place. It is one thing to be able to define the possible outcomes we face and put some kind of probability on the possibility that each might occur.
But we are not that lucky in this particular case.
We don’t even know what all, or even most, of the possible outcomes are.
And, we have policymakers who are being pushed to the limit in their attempt to guide us through this dilemma.
Right now, however, we don’t even know what the specific policies of the federal government and the Federal Reserve System are going to be in the near future.
All the more reason to get out of risky assets.
So, the policymakers face a real dilemma.
They don’t know what policies are going to be as we travel through 2022.
Furthermore, the policymakers don’t know how we, investors, are going to respond to the actions.
And, the policymakers don’t know how the rest of the world is going to respond to what they are trying to achieve, especially with regards to Russia.
Is this a time to buy or sell stocks?
My feeling is that the stock market will be lower at the end of 2022 than it is right now. Unfortunately, by the end of 2022 we may all be in a real mess.