MOORHEAD — The year is coming to an end, which means it is a wonderful time to look back at the major developments in the financial and business world. Your stock portfolio has most definitely seen some volatility and if you’re anything like me, you want to know why. Even if you don’t own stock in companies, it’s important to see how fiscal policy among other changes affected our economy these past few years.
You may have noticed that products and services you pay for on a daily basis have become increasingly more expensive. The Consumer Price Index, which tracks the percent changes in prices each month shows an overall upward trend in the prices of products including but not limited to food, energy, medical services, shelter, etc. Overall, the last 12 months have seen an increase of 3.2% in prices consumers are paying. On top of this, the 2022 CPI jumped 7.1% year over year. This is an overall 10.3% increase in the prices you pay for eggs, milk, gas, etc. This is also known as our current rate of inflation. So why does this matter?
The country’s rate of inflation has been a hot topic in the realm of finance for well over a year. The Federal Reserve determined a while back that they aim to keep the rate of inflation at 2%. They control this rate of inflation by increasing the federal fund borrowing rate. This rate has increased from 4% a year ago to 5.5% currently. Keep in mind that at the start of 2022, this rate was less than 1%. Without getting into too much detail, this federal borrowing rate directly increases the interest rate consumers and businesses pay on their new loans and current if they have a floating rate loan.
Companies and consumers are now spending more on their loans which means they are having to spend less on products and services. This is happening all while prices on those same goods and services are increasing. The stock market is adversely affected by both of these interactions. Companies’ margins are shrinking while overall revenues are decreasing. Overall, companies over the past two years have seen a fall in their stock price. During 2022, the SP 500 fell -19.64% which was during the implementation of the Federal Reserve’s “rate hikes” we discussed earlier.
However, this year the SP 500 has rebounded back to its pre 2022 highs. This is due to many factors such as the pause of the federal funds rate hikes. Another key factor is the AI tech company “boom”. We have all heard our teachers mention the use of “Chat GPT” and other AI tools. These companies have exploded in the stock market. The biggest company to stand out it is Nvidia with a year over year price increase of 174.54%. This significant change in price has benefited both investors who directly own companies such as Nvidia as well as those who own shares in the Standard and Poor 500 as well as S&P 500 tracking indexes. The SP 500 is market capitalization weighted, which means the movements of companies with the largest market capitalization have more of an impact than those with less. So, we are seeing this huge push towards Artificial Intelligence and the slowing rate of inflation which combine to increase investors’ confidence that companies will return to higher margins and increased profits.
2022 and 2023 have been a rocky experience for those who invest in the stock market. It has been ever reactive to the influence of Jerome Powell and the Federal Reserve as well the development of new technologies. Investors are, however, regaining their losses and holding on to the hope that there will be no more federal funds rate hikes and an increase in consumer spending.
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