ffinancial markets The nastiest surprises often come when something we take for granted is suddenly called into question – be it rising tulip bulb prices, functioning banks or life without lockdowns. Iinvestors had a rough time in 2022. But given the many trends that have changed direction throughout the year, the real surprise is that it wasn’t worse. Here were the key reversals.
end of cheap money
Future financial historians looking back to the 2010s will be amazed that people really thought interest rates would stay near zero forever. Also in 2021, reputable investment houses published articles with titles like: “The Zero: Why Interest Rates Remain Low”. The cost of borrowing had been declining for decades; The combination of the 2007-09 global financial crisis and the Covid-19 pandemic seemed to have glued them permanently to the ground.
In 2022, persistently high inflation broke the glue. The US Federal Reserve began its fastest tightening cycle since the 1980s, raising its target range by more than four percentage points to between 4.25% and 4.5%. Other central banks followed suit. Markets expect interest rates to stand still in 2023, peaking between 4.5% and 5% in the UK and America and 3% and 3.5% in the eurozone. But the chances of them collapsing back to nothing are slim. Fed governors, for example, believe their interest rate will end above 5% in 2023 before settling at around 2.5% in the longer term. The era of free money is over.
Death of the long bull market
Bull markets don’t die of old age, as the saying goes: they are murdered by central banks. And so it was in 2022, although the long bull run that ended had grown older than most. From the lows after the financial crisis in 2009 to its peak in late 2021, the s&p 500 index of leading American stocks rose 600%. Breaks in the uptrend — like the sudden dip at the start of the pandemic — have been dramatic but short-lived.
This year’s crash has proven to be sustainable. That s&p 500 fell a quarter to its low this year in mid-October and remains down 20%. msciThe global stock index is down 20%. Equities aren’t the only asset class to have been beaten, either. Stock prices have fallen in part because interest rates have risen, which has boosted bond yields and made riskier assets less attractive by comparison. The same mechanism pushed down bond prices to adjust their yields to prevailing interest rates. Global, US, European and emerging market bond indices, compiled by Bloomberg, a data provider, are down 16%, 12%, 18% and 15% respectively. Regardless of whether prices continue to fall or not, the “bull market in everything” is over.
evaporating capital
Capital was not only cheap in the last few years of the bull market, it was seemingly everywhere. Central banks’ quantitative easing (qe) programs devised during the financial crisis to stabilize markets have been revved up during the pandemic. Collectively, the central banks of America, Britain, the eurozone and Japan have spent more than $11 trillion in newly created money to suck up “safe” assets like government bonds and depress their yields.
This pushed investors into more speculative corners of the market in search of yield. In turn, these assets boomed. For the decade ending in 2007, American companies issued $100 billion annually of the riskiest high-yield (or “junk”) bonds. In the 2010s, they averaged $270 billion. In 2021, they reached $486 billion.
This year it has fallen by three quarters. The Fed and Bank of England have scaled back their asset purchase programs; The European Central Bank is preparing to do likewise. Liquidity is dwindling, and not just at the risky end of the debt market. Initial public offering (initial public offerings) broke all records in 2021, raising $655 billion worldwide. American now initial public offerings are facing their leanest year since 1990. The value of mergers and acquisitions has also fallen, albeit less dramatically. Capital abundance has turned into capital scarcity.
Value beats growth
The bull market has been a daunting time for “value” investors looking for stocks that are cheap relative to their underlying earnings or assets. Low interest rates and qe-driven risk-taking put this cautious approach out of fashion once and for all. Instead, “growth” stocks rushed ahead, promising explosive future gains at a high price compared to their (often nonexistent) current earnings. From March 2009 to the end of 2021, msci‘s Index of Global Growth Stocks rose by a factor of 6.4, more than twice the rate of the corresponding index.
This year, rising interest rates have turned the tables. At 1% interest rates, you need to put $91 in a bank account today to have $100 in ten years. With an interest rate of 5%, you only have to set aside $61. The end of easy money is shortening investors’ horizons, forcing them to prioritize immediate gains over those in the distant future. Growth stocks are out. Value is trending again.
Crypto Implodes (Again)
Those who believe crypto is only good for gambling and shady activities could not hope for a better example than Bitcoin Code’s downfall ftx. The crypto exchange was also reportedly the respectable face of the industry, run by Sam Bankman Fried, a 30-year-old philanthropist and political donor. But in November, the company went bankrupt due to a lack of around $8 billion in customer funds. American authorities are now talking about “massive years of fraud”. Mr Bankman-Fried was arrested in the Bahamas and is due to be extradited to America where he will be prosecuted. If convicted, he could spend the rest of his life in prison.
ftxThe demise of was the bursting of Crypto’s recent bubble. At its peak in 2021, the market value of all cryptocurrencies was nearly $3 trillion, up from nearly $800 billion at the start of the year. It has since fallen to around $800 billion. Like so many other things, the roots of the affair lie in the era of cheap, plentiful money and the all-is-go mentality it created. ■
