Why the Stock Market Has Been So Volatile in 2022

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The 2022 stock market has been one of the most volatile markets in history. The S&P 500 has experienced a drop of almost 20% so far and the Nasdaq 100 has experienced a drop of almost 30%. Growth stocks have also been beaten, with many falling between 50 and 80% YTD. Many people have wondered, what is causing this volatility and the recent behavior of the bear market?

There are many factors that have been attributed to this recent volatility. It could look at stock market gains along the Covid-19 and trigger the reason why markets are only “cooling off” for the next run. While other traders, such as The great shorts Michael Burry, say this downward trend has come to stay.

Related: three actions to get out of a difficult market

The Federal Reserve

The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics provoked the desire for central control of the monetary system in order to alleviate financial crises.

The Federal Reserve began reducing its balance sheet on June 1. This is also known as quantitative adjustment, also known simply as QT. During the pandemic, the Federal Reserve implemented the opposite, known as quantitative easing (QE). It uses QE in emergency situations and had sound reasoning to use QE during the 2020 stock market crash during the start of Covid-19.

Quantitative flexibility simply means that the Federal Reserve buys long-term securities to boost the economy in bad situations. It increases the money supply and reduces long-term interest rates. It also makes it easier for banks to lend and for people to do so.

Now, quantitative tightening means selling long-term securities and raising interest rates, which is exactly what is happening right now in 2022, and causing the stock market to “sell”. The Fed is trying to implement a soft landing here, and right now, it doesn’t seem so optimistic.

Related: Create more wealth by playing the stock market

What about inflation?

Another big reason the market is spiraling is that inflation rates are rising year after year. At the moment, the inflation rate in the US is around 8%, which is extremely high. We usually want an average of 3% when it comes to inflation; it is clear that we are well above this average.

Of course, many speculate that the inflation rate is actually much higher than what is being reported, with things like used cars, gasoline, food and household items between 10 and 50%. Much of this has to do with situations such as the war in Ukraine, supply chain problems and many other economic factors beyond our control.

Rising interest rates should reduce the rate of inflation, as higher interest rates tend to influence consumers to spend less and save more. Basically, the Federal Reserve is doing everything it can to keep inflation out of control.

Geopolitical issues

Another important factor in market volatility is the current war in Ukraine. Markets do not like the unknown, and they certainly do not like instability, which both increase during these conflicts. If this war escalated beyond Ukraine, we would see much more volatility in the stock market.

These geopolitical problems are also a big reason why gas prices are soaring to their highest level since 2008. Speaking of 2008, our last massive stock market crash was during the 2008 financial crisis. The financial crisis of 2008, or the global financial crisis, was a serious global economic crisis that occurred at the beginning of the 21st century. It was the worst financial crisis since the Great Depression.

Related: How to make smarter and safer investments in the stock market

Will 2022 be as bad as 2008?

This is an issue that many financial experts have been debating over the past few months. Every stock market crash is different and unique, but usually when everyone expects the stock market to fall, it usually doesn’t happen.

2008 was a very unique time that was the result of too many subprime loans being delivered to anyone who applied for them. 2022 is the result of an excess of quantitative easing in 2020-2021, which led to high inflation, combined with geopolitical problems in Eastern Europe. Will the Federal Reserve be able to have a smooth landing? That’s the million dollar question in all of this.

Should I buy the dip?

Unfortunately, we are unable to answer this question. However, a famous investment quote has calmed many investors in turbulent times: “In case of doubt, stay away.” If you have a long-term investment outlook, this recent volatility shouldn’t bother you in any way. Many famous investors like Warren Buffet are buying stocks at a faster pace than normal.

The U.S. economy is actually doing pretty well, and that’s why the Federal Reserve has so much confidence that it can now begin to adjust quantitatively. We have survived the 2008 financial crisis and the 2020 Covid-19 crash, so we will survive 2022.

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