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Stock, bond and crypto investors remain on guard after a brutal year for the markets

This year has been a bust for the markets.

Stocks plummeted. Bonds were hit by their worst sell-off ever. and cryptocurrencies were gutted, leading to the collapse of industry giants like FTX.

The turmoil in global markets had a chilling effect on Wall Street and beyond. Companies that had hoped for an IPO scrapped their plans. Banks, which normally collect fees for advising on deals and IPOs, are cutting their bonuses because of the drought. And retirees saw their savings shrink.

The S&P 500 fell 19% for the year, while the Dow Jones Industrial Average fell 8.8%. The Nasdaq Composite fell 33%, hurt by a sharp decline in technology stocks. All three indices posted their biggest declines since 2008, the year Lehman Brothers collapsed. Trading was quiet ahead of the bank holiday weekend and shares ended slightly lower.

Bonds had an even worse year. The yield on the 10-year U.S. Treasury — which drives everything from mortgage rates to student debt — rose to 3.826% from 1.496% at the end of 2021. Yields rise when bond prices fall.

how did it go so bad In short, investors and policymakers have been burned by bets that 2021’s inflationary surge would prove temporary.

Instead, price pressures were exacerbated by the Russian invasion of Ukraine, which sent oil and gas prices soaring in February and March. And even as energy prices fell, the inflation persistently high. To bring inflation back down, the Federal Reserve conducted its most aggressive rate hikes since the 1980s.

Tighter monetary policy caused investors to avoid the most popular bets in previous years’ markets. When interest rates were extremely low, as they were more than a decade after the 2008 financial crisis, it cost investors less to bet on stocks of often unprofitable companies that promised big growth rates for years to come. Now that short-term bonds, money market funds, and other cash-like investments are offering their best returns in years, many money managers are hesitant to bet on risky assets with uncertain payouts.

That explains why so many tech-driven companies have been hit so hard this year. The NYSE FANG+ indexwhich tracks meta platforms inc,

Amazon.com inc,

Apple inc,

Netflix inc

and alphabet inc,

down 40% year-to-date among other stocks.

Tesla inc

Stocks endured their worst year ever as Chief Executive Elon Musk became embroiled in more controversy at Twitter Inc., which he took over in October.

“We’ve been a bit spoiled in the past because we’ve endured a long period of rising stock valuations since the 2000s [and] relatively low volatility that was only interrupted during the financial crisis,” said Maria Vassalou, co-chief investment officer for multi-asset solutions at Goldman Sachs Asset Management.

That dynamic has been turned on its head by the Fed’s policy shift this year, she added.

Bitcoin plunged more than 60%, a sharp reversal after it soared to records in 2021. TerraUSD, a cryptocurrency that had been marketed as a safe haven from volatility, plummeted. Customers and clients of companies like Celsius Network LLC and Three Arrows Capital have had to try to get their money back after a spate of bankruptcies.

Increased volatility hasn’t been bad for everyone. Larger market volatility allowed stock pickers who had outperformed the crowd to make a comeback. According to a Goldman Sachs analysis conducted in mid-November, about 55% of actively managed large-cap mutual funds were on track to outperform their benchmarks this year, the highest proportion since 2007. So did hedge funds, which employed strategies to exploit volatility , performed best.

Another group that was richly rewarded: those who timed the great commodity rally correctly.

US crude prices surpassed $130 a barrel in March, hitting a 13-year high after escalating Russian attacks in Ukraine prompted lawmakers in the US and Europe to discuss an import ban on Russian oil and energy products . Although oil prices failed to maintain their momentum in the second half of the year, they still posted modest gains for 2022 – marking one of the few bright spots in an otherwise dismal year for markets.

The oil boom was good news for energy stocks. Western Petroleum corp

the producer who caught Warren Buffett’s attention and became one of Berkshire Hathaway inc

largest holdings, ended the year with its biggest annual gain ever. So does ExxonMobil corp

which, like its peers, posted record earnings in 2022.

The debate about what comes next is already well underway.

Many economists see the US slipping into recession next year. But the unemployment rate has remained at historically low levels.

Fed Chair Jerome Powell has signaled that he doesn’t think the fight against inflation is over yet. The markets are pricing in something completely different. According to FactSet data on the interest rate derivatives market, bond traders are betting that the Fed will switch from raising rates to lowering rates as early as next year.

Another sign traders are doubting the Fed is that the US dollar, which rallied against other currencies for most of the year as the central bank hiked interest rates, is yet to surpass its September high.

The differences are making some investors and analysts nervous about how 2023 will pan out. Will markets end up suffering deep losses as they did after the 2008 financial crisis, but bottom out when the time comes? Or will they fall longer than most expect? That was the case after the dot-com bust. The S&P 500 took 2½ years to bottom and repeatedly defied traders who believed they were just days away from the end of the sell-off.

For now, short- and longer-dated Treasury yields appear to be pricing in a dovish Fed – not a central bank that has said it will maintain tight monetary policy for the foreseeable future. That could spell trouble for traders if their assumptions about where monetary policy is headed next year prove wrong.

“We view all interest rates, particularly short ones, as too low,” said Roberto Perli, Piper Sandler’s head of global policy research and a former senior Fed staffer. For now, neither the stock market nor corporate debt seems to be pricing in the possibility of continued pain, he added.

Authors: Akane Otani at akane.otani@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

Source: Crypto News Deutsch

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