Three ‘F’ words to sum up 2022

By ForexTime 

This year has been fraught with market volatility, to say the least.

As we bid goodbye to 2022, let’s recap 3 major themes, each being an F-word, that rocked major assets over the past 12 months:

1. Fed

The primary driver of global markets in 2022 has been the most aggressive Federal Reserve – the US central bank – that we’ve seen since the 1980s.

Recall that a central bank’s primary weapon in cooling down inflation is to move interest rates higher. After all, the US was experiencing its fastest inflation in 40 years!

To be more specific, markets were caught off guard particularly by the speed at which the Fed raised interest rates this year (to be fair, many Fed officials themselves didn’t think they’d have to hike rates so much so soon either).

• This time last year, markets only forecasted that US interest rates would be hiked by a maximum of 75 basis points for all of 2022.

• Fast forward 12 months later, we have seen US interest rates skyrocket by 425 basis points, bringing the benchmark rate from near-zero now up to 4.5% – its highest level since 2007!

Gold’s enemy #1 for 2022 proved to be US interest rates climbing at that speed, and the US dollar soaring in tandem.

The market’s fixation on soaring US interest rates, coupled with the fact that gold is a zero-yielding asset (does not pay interest/generate income for investors who hold on to this asset) to drag down prices, despite the precious metal’s traditional roles as:

• Inflation hedge: a way to protect investors’ wealth against the corrosive effects of skyrocketing inflation
• Safe haven: a way to protect investors’ wealth in times of great uncertainty.

Hence, bullion was dragged down by as much as 22% from its post-Russian invasion peak to its lowest levels since 2020.

Though to be fair, spot gold has embarked on a remarkable recovery since early November on hopes that the “worst” of the Fed rate hikes are over.

READ MORE:

• September 2022: Why FX markets react to central banks?
• July 2022: Fed Decision – What you need to know
• March 2022: What does the Fed say? What does it mean for the US dollar, gold, and US stocks?

Now, here’s the second F-word …

2. Fear

From the Russia-Ukraine war that’s still raging on, to the UK’s worst cost-of-living crisis in a generation, and even crypto’s collapse – there were many notable events that frightened investors and traders worldwide.

Such events hastened those in the markets to scrambling for ways to protect their money.

Amid all the FUD (fear, uncertainty, doubt), one particular asset reigned supreme = King Dollar.

Note how the benchmark Dollar index, DXY (used to measure the US dollar’s overall performance, though specifically the US dollar’s performance against 6 other major currencies) soared by as much as 20% this year.

READ MORE:

• November 2022: Thanksgiving – 3 assets that can be grateful for 2022
• September 2022: How does the US Dollar typically fare in September?
• March 2022: 3 reasons why the US dollar is climbing

Though since late-September, the DXY has halved its year-to-date gains, on the hopes that the Fed is closer to being done with its interest rate hikes.

Still, to prove the US dollar’s dominance as the safe haven of choice for 2022, here’s a comparison of how the DXY fared against other traditional safe haven assets, as measured by their respective year-to-date performances on this penultimate day of the year:

• DXY = +9%
• Gold = -1%
• Swiss Franc = -1.4%
• US bonds = -13% (as measured by the Bloomberg USAgg Index)
• Japanese Yen = -14%

And now, for the final F-word of this year-in-review article …

3. Fundamentals

Remember the days when central banks were printing money out of thin air and just dishing it out?

Well, a lot of that money also made it into stock markets, which sent prices to record highs.

Recall how the S&P 500 set a record high on January 3rd, 2022?

Well, those days are now long gone.

Central banks sought to suck some of that money back out of the financial markets, either by hiking interest rates or by halting the purchase of bonds (quantitative tightening).

This year, companies had to wave bye-bye to easy money, with interest rates no longer at record lows.

Hence, investors demanded that these companies return to the fundamentals: show that it can continue churning out profits in the future.

Companies with weak fundamentals, whose future profitability or growth were in severe doubt, were roundly punished by the stock market:

• Coinbase (crypto platform) = -87%
• Snap (social media) = -82%
• Tesla (EV maker) = -68%

(NOTE: It was a particularly brutal year for EV makers, with the likes of Lucid Group, Rivian and Nio each suffering even bigger annual losses than Tesla’s)

Even Big Tech giants such as, from Amazon to Meta, had to let go tens of thousands of employees this year.

Such layoffs were carried out in the name of making sure these companies remain financially sound amid these turbulent times.

Furthermore, with the Fed rate hikes threatening to send the US economy into a recession, such a contraction in the world’s largest economy is expected to negatively impact the earnings of these publicly-listed companies.

Amid all these woes, and the end of the easy-money era, no surprise that the S&P 500 may well end the year in a ‘bear market’ (a 20% drop from its recent high).

READ MORE:

• September 2022: UPDATE – Is the worst really over for US stocks?
• June 2022: What is a recession? And what it could mean for stocks, oil and gold.
• May 2022: S&P 500 set for ‘bear market’. How much further can US stocks fall?

So, there you have it.

3 ‘F’ words that encapsulated a year to remember.

But before we wrap up, here’s a “bonus” F-word for you to consider … “Future”.

After all, investors and traders are forward-looking creatures, with today’s prices reflecting what markets think/believe/hope will happen down the line.

With that in mind, do look out for our 2023 Preview that’ll be posted here on this “Market Analysis” section soon.

Thank you for reading our Daily Market Analysis throughout 2022.

We hope to continue keeping you up-to-date on all the major happenings happening across FX, commodities, precious metals, and stocks in the year ahead.

Have a happy new year, and may 2023 be a rewarding time in the markets for us all.

Article by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com