How current market volatility is affecting investors in Q1 of 2022?
2022 has been very volatile since the beginning of the year and has drastically affected the equities, bonds and forex market. The stock market seems to be the most highly impacted as of now, especially in the US and Europe. In our article, we will understand the reason behind this volatility, the future and how the current market volatility is affecting investors in the medium term.
Why are the markets so volatile currently?
Markets are always volatile for various reasons like the demand and supply factors, significant economic announcements, financial news, or a grave pandemic/war like situation. Right now, as followed by the Russia Ukraine crisis, the stock market is following a solid reaction to the 2021 stock market sentiment when US stocks went up over 2% and fell after that.
In January, the US Fed sat down that the country is putting its prime focus to cut down inflation before anything else and is going to make an effort to use all possible tools to reduce it. This gave investors a hint about the Fed Fund rates increasing after the Fed also talked about selling its assets later in the year. The combination of the amendments and policies taken by the US was one of the biggest reasons why global and US markets significantly fell.
As of now, there is a current market shift happening globally where investors are moving from the US equities market to the other strong financial markets of the world. The financial markets in countries like the UK, China, Japan, Hong Kong and more have been providing much better results than the United States of America in their financial markets in 2022, which indicates a positive outlook for the world equities market to soar in the coming months.
Will corporate earnings and monetary liquidity impact the ongoing volatility?
As more and more investors are entering the equities markets and trading stocks around the world, the liquidity has gone up massively. The US consumers, as of now, have about 5 trillion dollars of cash on them, and the money supply has been more significant than ever before, with credit being available quickly and financial conditions being as benign as history has ever seen.
In the US and other countries, corporate earnings have been more substantial than the past years (the last two years, especially) and are not going to be exhausted anytime soon. A recessionary pressure is far-fetched, and so the volatility is seen more in context with the massive liquidity than the gigantic corporate earnings.
Coming out of the coronavirus pandemic and the related losses have strengthened the monetary stimulus across countries. Interest rates are at a low level after the high inflationary pressures, leading to a maintained economic condition in the long term.
So, corporate earnings alone are not going to negatively impact the financial market liquidity but might help investors protect themselves against losses as their risk appetite is more, for now, provided the stronger earnings than before.
Which sectors in the equities market are the most impacted?
Different sectors across the equities market have been affected very differently in the volatility period. Some sectors have benefitted from the price fluctuations, whereas some, not so much. The energy sector is an area that was the most positively impacted and benefitted from the high volatility in the market as they are known to be the value stocks, and investors shifted their money from other stocks to get their hands on a safe haven asset like oil and gas.
Technology, healthcare, communications and consumer discretionary, out of the many growth stocks, have been the worst affected as their prices have dropped to a substantial extent due to the over valuation. However, these sectors are expected to grow very soon, in fact, faster than the overall economy and other industry sectors.
Companies that have a high rating but did not return high dividends during the volatility period have also been negatively affected. These companies include small technology companies, newly listed startups and the ARK companies as well. Overall, companies with a small market capitalisation were greatly impacted since the beginning of the last quarter of 2021, along with firms with stronger cash flows and high dividend payers being comparatively less impacted.
Conclusion
Overall, the markets currently are very volatile, and most equities are witnessing a price drop. However, mirroring similar past events, the markets will speed up once again slowly and gradually. Investors with a long-term perspective have a positive outlook to look forward to as the volatility is not going to drastically wash out earnings.
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