The Stock Market Crash of May 2022
Yimin Huang | May 24th, 2022
Source: Spencer Platt/Getty Images
At the beginning of May, the Dow Jones Industrial Average and NASDAQ saw their worst single-day declines since 2020. Weak e-commerce stocks contributed to the index declines: Etsy -16.8%, eBay -11.7%, Shopify -15% (CNBC). Tech stocks are also performing poorly: Meta -6.8%, Amazon -7.6%, Microsoft -4.4%, Salesforce -7.1%, Apple -5.6% (CNBC). Cryptocurrencies also took a hit - Bitcoin, the world’s most popular cryptocurrency, fell below $30,000 on 9 May 2022, more than 56% down from its November high of $69,000 (CNBC). The last time Bitcoin traded below $30,000 was in July 2021. Crypto market analyst at Japanese bitcoin exchange Bitbank Yuya Hasegawa said that Bitcoin needs to maintain a psychological level of $33,000 to maintain technical sentiment (CNBC).
Why did this happen?
There is no definite, singular answer for why stocks rise and fall, and why markets act the way they do. However, contextual factors can provide some explanation as to why investor sentiments are exceptionally poor at this time.
Inflation is a significant problem for many countries, with inflation rates in the United States near their highest in 40 years. Russia’s ongoing war in Ukraine could further exacerbate supply chain issues, oil price fluctuations, and inflation. COVID outbreaks and slowing growth in China are also resulting in greater uncertainty and volatility. Overall, investors are anxious about what is next to come and what policymakers are going to do about it.
The Federal Reserve is raising interest rates to bring back price stability, but this has made investors anxious about the possibility of a recession. Moreover, higher interest rates reduce a portion of future profits, and for high-growth stocks, those future profits are exceptionally important.
Another reason for the poorly performing financial markets could be that the dips in the market were expected given the gains in recent months and years. After the stock market suffered greatly initially at the start of the COVID-19 pandemic, markets started to look upbeat. The S&P 500 climbed by 16 percent in 2020 and 27 percent in 2021 (Macrotrends.net). Individual investors have also piled into the stock market, pushing up meme stocks like GameStop, Dogecoin, and AMC. Now might be the time excitement dies down and the fundamentals of the particular asset class start to emerge. This is perhaps a real-life example of the common saying in finance that “markets take the stairs up and the elevator down”.
Conclusion
Ultimately, markets rise and fall naturally, and market declines are pretty common. For the individual investor, basic investing principles should apply to build a portfolio personalized to their investing timeline and risk appetite, and take necessary actions to protect oneself from significant losses.