US Stocks Drop With Bonds As Brutal Year Nears End
As the year nears its end, US stocks have been in free fall and bonds have dropped as the world’s economy grew more uncertain. This comes as the World Bank warned that the global growth may be choked. In addition, there have been several major negative events which have weighed on the markets. These include:
European stocks on course for worst year since 2018
Stock markets are on course for the worst year since 2018 and a potential recession. The DAX Index has slid 12% in the year so far, and the STOXX 600 has dropped a further 0.5%. It has been a tough year for European investors, as tighter monetary policy and a soaring inflation rate have led to renewed volatility.
On top of the tightening stance by the European Central Bank, global economic growth has also been slowing. Russia’s war in Ukraine has been causing supply chain issues, and Western sanctions on energy and food imports have led to inflation in key sectors.
Despite the rebound in the first quarter of the year, market experts expect a more subdued appetite for risky investments in the coming years. A recession is likely in the euro area, and there are worries that Britain may be in its longest recession on record.
Tesla on pace for worst month, quarter and year on record
Tesla (TSLA) shares have plunged over 40% in the past month and are on pace to set a record for the worst quarter, month and year in the company’s history. While the electric car maker has managed to deliver more vehicles than it has sold, the company faces growing challenges in securing and transporting its vehicles.
In a recent Q2 financial report, the company reported that deliveries of its Model S, Model X, and Model Y crossovers increased by 26.5%, but the overall gross margin was down by a few percentage points. The company’s automotive margin was 27.9%, down from 31.2% in the previous year.
Tesla’s Q2 results were well ahead of expectations. It logged a gross margin of 25.1%, and its operating margin was nearly 21.7%. However, it said it faced difficulties in securing a cost-effective transportation capacity.
Uncertainty contributes to market downturn
Uncertainty is a huge concern for companies. They cannot accurately predict their future earnings and sales, which can lead to reduced hiring and production activity. When uncertainty spikes, it can lead to a market downturn, which means a recession.
There are several ways to measure uncertainty. One is the VIX, which is based on the price of S&P 500 index options. This measure of market anxiety shows investors’ nervousness, and is used in finance to calculate the value of securities.
Another measurement is the stock market, which tends to be volatile after a major terrorist attack. During this time, investors will sell their holdings in stocks considered unsafe, and invest in other assets such as gold.
In general, economic uncertainty increases during recessions. Companies are more likely to hold off on hiring, reducing their productivity and causing a depreciation in the value of their stocks.
Fed’s drive to reduce inflation
The Fed is battling inflation on several fronts. It’s a tussle that could linger into 2023.
The Consumer Price Index (CPI), which strips out food and energy expenses, showed a 0.1% increase in November. It also slowed for five straight months, compared to a 2.4% increase in October. Despite these lagging trends, inflation is still high.
As the Federal Reserve strives to bring inflation down, it has raised interest rates seven times in 2022. This slowed down economic demand and raised long-term borrowing costs.
It has also triggered a wave of asset repricing. A decline in the value of stocks compared to bonds is one of the more obvious effects of this shift. However, a weaker equity market also helps to restrain the speculative excess.
World Bank warning that global growth may be choked
The World Bank warned that global growth could be choked in the near future and that many economies may fall into a recession. Among the risks are the Russian war in Ukraine, supply chain chokeholds, and rising food prices.
Russia’s invasion of Ukraine has accelerated the global slowdown and is causing a spike in food prices. Policymakers should counter this by boosting production and avoiding import restrictions.
The report also notes that the global economy is vulnerable to a sharp escalation of stagflation. This could have a negative impact on middle-income countries, which are likely to experience a period of weak growth.
Growth in emerging market and developing economies is projected to decline to 3.4 percent in 2022, down from 6.6 percent in 2021. The regional European and Central Asian economy is expected to contract by 2.9% in 2022.