Stock markets have historically rallied higher when investors hold a lot of confidence in them. Situations of high confidence have often followed a period of hesitation in taking risky steps to make investments. When that takes place, stock markets plunge.
The period following the massive lockdowns globally to stop the spread of Covid ignited investor confidence, pushing the markets some points higher than the 2020 close. However, in 2022, the gradually increasing inflation pressured many central banks to take action—a situation that highlighted how interest rate impact stock markets.
While the increased interest rates are taking hold in the markets, the swings are becoming a warning sign of a market plunge in the near future.
Stock Market Plunge Warning Signs
A snapshot from the markets in the year so far has shown slight drops in top indices coming before the announcement of an interest rate hike by the central banks. Going back to mid-June 2022, an anticipation of an interest hike by the Fed reserve lowered the markets to about 0.5 percent. The markets at the time quickly picked momentum and jumped up by 0.8 percent due to the resilience of companies and the higher earnings reported.
Mixed sentiments in the market can usually correct some reverses taken by the markets, but that can only happen in the short term.
Grim situations in one area in the markets often have effects everywhere else, with some government-backed bonds being the only exception. Crypto stocks have heavily felt the steps taken by the actions of the Fed. For the first time in a decade, bitcoin fell by about 70 percent—falling below $20000 for the first time since November 2020. The colossal fall is evidence that markets rely on stability to prosper.
The stock market also received a boost in June when news reports broke that the raging inflation had already reached a peak in the US. Such news offers confidence to the markets, which experienced a short momentum heading into the fourth quarter.
Instability in Eastern Europe and the Oil Market
Eastern Europe has yet to find stability to bolster the markets to reach new highs eight months later when war broke out. The continued conflict means that the oil and energy markets are yet to stabilize. Europe in the meantime is scrambling to fill the gaps left by Russia, which is one of the world’s largest oil suppliers.
OPEC Cuts Oils Supply
The months leading to October were one of the best for oil consumers in the United States after a period of record fuel prices recorded in history. However, in the weeks leading to mid-October, that is changing quickly. Oil prices have been rapidly moving upwards.
OPEC, a coalition of countries extracting and importing oil, anonymously legislated to cut oil supply. The organization came to the understanding that lower oil production will help stabilize the market as the world prepares for a global recession. The organization also argues that some sections of the world economy are already in recession, and doing so will protect the industry from adverse economic reactions. However, the US is not convinced by the decision taken by OPEC.
Cuts to oil production are a detriment to higher cost of living in weeks or months to come, meaning that places that were already on a positive recovery trajectory in their inflation rates will feel the hit again.
Impact of Instability on the Markets
To correct any reverse in the levels of inflation, the Fed will have to act, creating volatile markets. Central banks all over the world will act too. Ultimately, depending on how investors react to the new measures from the Fed or Central banks globally, an exodus might ensue to less risky assets. Triggering a stock market plunge.
Closing Remarks
Investors often have their way with the markets. The higher confidence exhibited in the markets, the greater the stocks will climb. Interest rates have dominated the markets in 2022, and the swings witnessed in reversing them higher will have a net effect on the stock market.