Jan 5, 2023 4 min read

Financial investors suffered a nightmare in 2022. After enjoying a 12-year bull market, utopia came to an end last year. Beginning at the conclusion of the last market crash in 2008, the stock market enjoyed a near perfect environment. Interest rates were near zero. Some countries even had negative rates. These low rates made corporate borrowing cheap. Often companies borrowed to repurchase their own shares. This can artificially inflate the shares value.

It was also cheaper for companies to merge and build new facilities. Because bonds and CDs were paying such low rates of return, many investors took on more risk they would have preferred by investing in the stock market. Since the stock market is the biggest auction in the world, these additional buyers drove up share prices.

Until last year. Inflation had stayed low. The Fed has a targeted rate of 2% inflation. If the rate goes above this, they will take action to reduce liquidity in the market. They used two steps in 2022 to start slowing inflation. One is by increasing interest rates and the other was by reversing quantitative easing. This is when they sell some of their portfolio of government bonds.

Inflation got out of control by leaving interest rates too low for too long, over government stimulus during the pandemic, supply change disruptions and the war in Ukraine. What will make inflation harder to get control of this time is the unemployment rate has remained low. There are more job openings than there are applicants. This has forced wages to be increased. This cost will not go back down as the economy slows unlike a rise in oil prices, which can go down just by increasing supply or slowing consumption.

Much of the gain in the market over the last five years was fueled by the so-called FANG stocks. These were Facebook, Apple, Netflix and Google. Them along with others such as Amazon, Microsoft and Tesla were considered market disrupter which meant they changed the way business was conducted. Investors were often willing to let them have price/earning ratios way higher than other companies. Volume was all that mattered and not profitability. These tech stocks on the Nasdaq exchange were the darlings of Wall Street.

Last year when the FED starting raising interest rates, these stocks got clobbered. For the full year, the Nasdaq slid 33% their steepest decline since the market crash of 2008. Amazon dropped 80% in value. They sold lot of merchandise, but did not make a lot of profit and built too many warehouses. Facebook, changed its name to META and lost two-thirds of its value. Apple lost over a huge amount of value!

Remember, it is much easier to lose money than it is to recover the losses. If a stock is selling for $100 per share and falls 50%, it is now worth $50. If it goes back up 50% it is only valued at $75. You still have a 33% loss! Wall Street keeps hoping the FED will cry uncle and start reducing interest rates. That is not going to happen any time soon, because the FED jobs is to slow the economy during periods of inflation not help the stock market. Interest rates will continue to rise at maybe a slower rate will last probably a year or two longer and probably not return to zero again.

While the other indexes were not down as much as the Nasdaq, the Russell 2000 small caps were down 21.56% and the S&P was down 19.44%. Still substantial losses. Investors supposed safe money in bonds also went down significantly as always happens when interest rates go up.

Now that we are back in a more realistic time frame, people need to rethink their financial strategy. If you are retired or close to it, you must realize that income is more important that capital gains. You must have a written financial plan that is based on math and science and not hocus pocus.

Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.