The stock market’s final trading session of 2022 has closed, marking the worst year for stocks since 2008.
The Dow Jones Industrial Average shed more than 90 points on Friday, or about 0.27%. The tech-heavy Nasdaq fell modestly, and the S&P 500 fell by just about 0.3% on the last day of trading before the new year.
Friday’s loss fits the trend that stocks have been feeling all year long. Since the start of 2022, the S&P 500 has fallen by a weighty 20%. The Nasdaq, reeling from months of losses by tech companies, lost nearly 34% of its total value in the past year, and the Dow has declined by a more modest 9%.
This past year was a year of great uncertainty. The new year was ushered in by high inflation, which eventually grew to levels not seen since the 1970s. Many of the economists analyzing the inflation situation weren’t even around during the country’s last inflationary period.
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Because of the too-high inflation, the Federal Reserve began jacking up interest rates at an increasingly aggressive pace. At one point, the Fed hiked rates by 75 basis points four times in a row — a level that is akin to a dozen conventional rate hikes in a mere matter of months.
The central bank’s rate target is now 4.25% to 4.50%, the highest it has been since before the financial crisis in 2008. A survey of Fed participants released after the meeting shows that most foresee the target rate rising to 5% to 5.25% in 2023, which implies another 75 basis points of hikes still in store.
As inflation has remained stubbornly high and rates have soared, the odds of a recession have grown, causing stocks to falter out of fear of a broad-based economic downturn.
Economic modeling by Bloomberg assigns a 100% chance of a recession occurring by next October, and the Conference Board, based upon its probability model, also predicts a 96% chance of the U.S. economy entering into a recession in the next 12 months. The group also predicts the last quarter of this year and the first quarter of 2023 will experience negative real gross domestic product growth rates.
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A recession in the new year would likely go hand and hand with further declines in the stock market as companies begin to cut jobs and investment slows. Some companies, for instance, Tesla, have already begun discussing layoffs and hiring freezes.
