After New Year's Day, global stock markets began a downward trend. In just over a dozen working days, the Dow Jones Industrial Average in the US stock market fell by nearly 5%, the Nasdaq Composite Index fell by nearly 10%, and the S&P 500 also declined by 6%. Our large A-shares were not spared, with all three major indices entering a downward mode. The Shanghai Composite Index fell by over 3%, the Shenzhen Component Index fell by over 5%, and the ChiNext Index fell by nearly 9%. Both US and A-share markets, which were expected to start the year strong, instead began with a downturn. Many people are asking, will there still be opportunities in the stock market in 2022?
A Year of Interest Rate Hikes by the Federal Reserve
Affected by the pandemic, in order to revive the economy, central banks around the world were in a race to ease monetary policy in 2020 and 2021. However, it's difficult to retract the flood of money, especially in the United States, which was particularly enthusiastic in its monetary easing, injecting nearly $10 trillion in total. But the resulting inflation was severe. According to currently released data, the US inflation rate in December was around 7%, exceeding 6% for three consecutive months. Many people do not fully understand inflation; in essence, if a bowl of noodles costs 10 yuan this month, it will cost 10.7 yuan next month, and 11.45 yuan the month after, and by the end of the year, prices will have essentially doubled. To curb this phenomenon, in 2022, various meetings of the Federal Reserve have hinted at the need for interest rate hikes to control inflation.
Advertisement
Can interest rate hikes control inflation, and what impact will they have on the stock market? The Federal Reserve has revealed hawkish signals in multiple meetings, and economists believe that the interest rate hike mode will begin in March next year. Many people think that interest rate hikes mean reducing the supply of money, thereby reducing the actual currency in life, thus controlling inflation. In fact, the current economic patterns and policies adopted by various countries are not like this. Interest rate hikes are just a guiding control over the speed of money supply, meaning that if I inject 10 yuan more than last year this month, I will inject 1 yuan more than last month next month. In this way, the speed of money supply slows down, and the rise in the inflation rate will not be as fast.
Generally, inflation will continue to stabilize for a few years. Once economic development and prices match, inflation will restart its inflationary mode. Many people have been hoping for a drop in prices, but in reality, a drop in prices is more harmful than a rise in prices. A decline in prices implies economic stagnation, weakened corporate profitability, and thus, fewer job opportunities. With fewer job opportunities, bonuses are reduced, and with less bonus money, people's willingness to consume weakens. Goods become even harder to sell, creating a vicious cycle.
What impact will interest rate hikes have on the stock market?
During the New Year period, A-shares entered a pattern of steady decline. Which sectors saw the largest declines? In December, affected by Omicron, the pharmaceutical sector experienced a resurgence, so in January, the decline was significant. The decline in medical services exceeded 10%, and the declines in metal new materials and national defense and military sectors also exceeded 10%. Semiconductors and power equipment sectors saw declines close to 10%, consumer electronics exceeded 6%, medical device sectors also exceeded 5%, and biopharmaceutical and real estate services sectors saw declines exceeding 5%. However, the scenic spots and tourism sector was the fastest-rising, with an increase of over 7%, and the coal mining sector also exceeded 5%. The airport and shipping sector rose by nearly 5%.
The Federal Reserve's interest rate hikes have, in fact, directly frightened the stock market. The stock market has always been about valuation, which is when an enterprise can recover its principal based on this development speed. If the development speed changes, the valuation naturally changes. The Federal Reserve's interest rate hikes mean that the speed of money entering the market slows down, and thus, the development speed of the real economy also slows down. The corresponding development speed of enterprises also slows down, so the valuation basis changes, and the stock market takes the lead in falling. Similarly, when we consult data, we can see that the average return rate of private institutions in 2021 was only about 12%, and public funds were less than 10%.
If the Federal Reserve raises interest rates, then the risk-free interest rate will rise, and more profit can be earned by depositing money in banks. Who would still be willing to take risks and invest in the stock market? This is why the Federal Reserve's interest rate hikes have a significant impact on the stock market. We also know that the foundation of the stock market is expectations, expectations that corporate operations will improve. In the first half of 2020, most enterprises' profits were not very good, so in 2021, the stock market expected a significant improvement in corporate performance. However, 2022 is different; the growth in 2021 was too fast, and naturally, the growth rate in 2022 will slow down. The stock market in January was very unattractive.
In 2022, we can no longer choose sectors that grew too fast last year, such as last year's medical sector, transportation, precious metals sectors, chemical industry, etc., but instead, we should target sectors with expected performance improvements, such as airport shipping, scenic spots, and tourism, etc.