Morning Brief: Why Ordinary Investors Got Struck in 2022

We’ve heard from many investors who got hit hard by the market’s topsy-turvy 2022. Here are some of their tales, along with our analysis:

We’re going to look at five factors that were weighing down stocks and bonds during this year. And we’ll discuss some strategies for investors looking to keep their portfolios from going down even further in 2023.

Inflation is a general increase in the prices of goods and services that typically occurs over time. It can hurt everyday consumers, savers, and fixed-income investors, but it can also help borrowers and lenders in some cases.

In 2022, inflation reached its highest level in 40 years as a series of events worked together to cause prices to surge. Economists believe that increased demand, supply chain issues, government spending, and the war in Ukraine all contributed to the inflation’s rise.

While inflation may not hurt every business directly, it can significantly impact startups that rely on external capital to fuel their growth. Higher costs make a company’s cash burn rate (the amount of time it takes to run out of money) faster, which can slow down its growth.

The Federal Reserve (Fed) is one of the most powerful economic institutions in the world. Its responsibilities include setting interest rates, managing the money supply, and overseeing financial markets.

The Fed’s monetary policy tools are used to manage the economy and achieve the goals of stable prices, high employment, and economic growth. It also acts as a lender of last resort when the economy faces a crisis.

But aggressive monetary policy increases can also spawn recessions. Higher interest rates can make loans more expensive, and businesses and consumers reduce spending.

That happened in 2022 when the Fed began raising interest rates faster since the 1980s. Its moves triggered the highest inflation in decades.

The Fed’s aggressive monetary policy has also caused significant problems for some systemically important financial institutions. These firms might have to revalue their investments, hurting their performance.

In 2022, tech stocks were hit by a barrage of headwinds, including the war in Ukraine, COVID-19 lockdowns in China, high-interest rates, and a strengthening U.S. dollar.

The Federal Reserve raised interest rates, which prompted investors to shift their money away from riskier investments like tech stocks and toward safer options. That led to a drop in stock prices, making it harder for companies to profit and forcing them to cut costs.

This has put many big tech companies in a difficult position as they attempt to navigate the current economic downturn and prepare for the next one. For tech giants, this could mean laying off employees and cutting their advertising budgets.

While many investors consider bonds boring and relatively safe, fixed-income markets can significantly influence the stock market. And when stocks and bond prices fall together, it’s usually bad for ordinary investors.

Interest rates follow long-term growth and inflation trends. However, a variety of developments altered the bond market landscape in 2022. These included continued supply constraints for goods, a significant shift in monetary policy by the Federal Reserve (the Fed), and Russia’s invasion of Ukraine.

As a result, interest rates rose in 2022. The Fed gradually increased in March and quickly escalated the rate hikes throughout the year as the economy improved and inflation surged.