What is causing the volatility in the markets in 2022? The answer is complicated, yet quite simple. People are worried about their future. When they worry, they become stressed. When they are stressed, they make poor decisions or delay making decisions. They start panic selling, stop investing because they believe markets will only go down. Lately, the markets are feeling the worry and stress of the people.
The complicated answer is that people are concerned about several factors they fear are hitting them all at once. Growing concerns of inflation, rising interest rates, the fallout from the war in Ukraine and the potential for a recession to name a few.
So far, the governments have failed to act timely with solutions (raise interest rates and remove stimulus) to get inflation under control. The longer these decisions are delayed the larger the problem becomes. Stock markets are looking for decisive action to combat inflation. Investors do not like uncertainty, remember March 2020 early in the pandemic. They want to see rates rise higher and faster as they see that as a solution.
The war in Ukraine has presented several additional challenges. The food supply and gas disruptions are adding to the inflation problems. As an example, the higher diesel costs to deliver the food to stores increases the cost of our food.
While higher interest rates combat inflation, higher rates also increase the cost of repaying debt, meaning people with debt will spend less elsewhere. They start to ask themselves; can I afford to keep my house or buy/lease my next car when rates are higher?
When consumer spending decreases, it will have a negative impact on the economy. This is where the recession fears come in. I say fears, as the fear of a recession is much worse than a recession itself. Will I lose my job if we go into a recession, etc.
The result is investors lose confidence that these problems can and will be solved in timely fashion before they get out of control. And that is where we find ourselves today. Fearful that things are only going to get worse, and no idea for how long. When investors believe they see a light at the end of the tunnel, they will start to feel better. This is all about how people feel. Once they feel better, they become buyers rather than sellers and markets will respond in a positive fashion. For people to feel better, they need clarity on how they see their future.
So, what matters most for the markets is how people are feeling. It’s their feelings that dictate their actions. To understand today’s markets, just look around you at the price of everything, not just gas and food and listen to what people are talking about. They are concerned that with everything going on, the businesses they are investing in will have a harder time generating profits. In time, the conversations will change and so too will the markets. The question is not will this happen, but when will this happen.
