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Why the markets fell in January of 2022

Many of our clients have been wondering why the stock market fell during the first part of 2022. Below is our understanding of why this happened. We hope that you find our explanation to be both inciteful and helpful!

The stock market posted high returns in 2020 and 2021. However, events began to unfold during the second half of 2021 which suggested to some investors that 2022 might not be quite as upbeat for the stock market.

  • The Omicron variant proved to be more contagious than previous Covid-19 variants. This gave investors a reason to worry that things might never get back to “normal” for the global economy.
  • Inflation rose to a 30 year high in the United States. This may have been caused by the U.S. government generating about $20 trillion of new debt since 2008 in its attempts to repair the U.S. economy after multiple financial crises. Inflation causes the prices of goods and services to increase. High prices often cause people to purchase less goods and services which can hurt an economy.
  • The Federal Reserve confirmed that it would raise interest rates in 2022. Rising interest rates can temporarily hurt the bond and stock markets. We sent an article to you about this in October of 2021. Please click here to learn more.
  • Russia surrounded Ukraine with over 100,000 troops. Tensions between Russia, Europe, and the U.S. raised considerably as it became apparent that Russia might actually invade Ukraine. This was of particular concern because Russia is one of the world’s largest producers of oil and wheat. The prices of oil and wheat had already risen due to high inflation. How much more so if Russia became entangled in land war with Ukraine and an economic war with Western Europe and its allies?

While these events should have given investors cause for concern, they cannot fully justify why the stock market fell so much during the beginning of 2022.

  • While more contagious than its predecessors, the Omicron variant of Covid-19 has also proven to be the least deadly. So much so that many countries are removing their Covid-19 restrictions such as mask mandates.
  • High inflation has historically resulted in lower returns in the stock market. However, it is commonly believed that stocks can at least partially hedge against losses from inflation. That is because a company's revenues and profits should grow with inflation after a period of adjustment.
  • Investors have known for almost a year about the Federal Reserve raising interest rates. In fact, Kilmer & Company adjusted most investor portfolios to take this possibility into account in April of 2021.
  • Russia’s aggressive moves against Ukraine could potentially pull Western Europe into an ugly political and economic battle with Russia. It could also cause the prices of oil and wheat to increase for European countries who buy these commodities from Russia. However, the United States can produce large amounts of oil and wheat, so it does not need to maintain close ties to Russia to gain access to these commodities.
  • Russia’s President Putin may be possibly using the threat of war to negotiate with the West regarding other political goals he has. This would be a much more politically savvy move for Putin than to become entangled in an expensive war with the Ukraine. Should this be the case, then the standoff in Ukraine may not last as long as some believe.

Also note that election years are generally good for markets as incumbents don’t want to be seen as the cause for a bad economy.  While this is a mid-term election year, both political parties see it as critical to prove themselves to the public right now.

This leads us to believe that the U.S. stock market did not fall in January for any one of these particular reasons. Instead, it was likely a combination of all of the above which caused investors to sell their stocks. U.S. investors were sitting on unusually large gains. They didn’t know if the stock market would continue its upward streak in 2022. They saw some reasons to be concerned and decided to not take the risk. As some investors sold out, others jumped on the bandwagon for fear of missing out on something they didn’t quite understand. This created a snowball affect as more and more investors worried that they needed to dump their stocks as quickly as possible.

As long-term investors, we at Kilmer & Company believe that the best approach to investing is to be prepared and to keep a cool head when things become scary. That is why we adjusted most of our portfolios in early 2021 to prepare for the rising inflation and interest rates which we are experiencing now. We then stayed the course throughout this most recent market volatility by not making any further changes to our portfolios in 2022. We are monitoring the situation closely, however, and will make adjustments as we see opportunities to provide our clients with long-lasting benefits. So let’s swing into Spring with level heads and our eyes on the ball, while we wait for baseball’s Spring training to begin!


The views expressed are those of the author as of the date noted, are subject to change based on market and other various conditions, are not a solicitation to purchase or sell any security and may not reflect the views of United Planners Financial Services. Keep in mind that current and historical facts may not be indicative of future results.