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Marc Cuniberti: Reasons for the sell off

On Friday, April 22, the Dow lost almost 1,000 points. We had not seen that bad of a day since 2020 when COVID-19 first hit.

Keep in mind, after that similar day in 2020, the Dow screamed back even higher soon thereafter, so hope springs eternal.

Investors might take heart knowing that bad sell-offs can be followed by equally eye-popping rallies. Not to say the pain is over, as there usually are reasons for massive routs, and this crash is no exception.

The NASDAQ actually started its slow motion crash late in 2021. In my opinion, the sector represented by the NASDAQ simply got too frothy, and it finally reversed as investors took profits.

That was followed by investors finally taking notice, at the start of 2022, of the inflationary forces that had been accelerating for about a year. Consumers likely knew prices were jumping more than usual. You would have had to live on the moon not to notice. But in the market, fear tends to surface all at once, and can come to a head in a horrific crash on any particular but obscure day that no one can predict.

Detailed in numerous Money Matters shows and articles, and shouted from the roof tops on many news media outlets, inflation had been getting worse for months, and it was only a matter of time before the Federal Reserve decided to do something about it. Originally believing it was “transitory” (in their own words), inflation was actually just getting started, and similar to other times in history, the Feds were late in correctly assessing the severity of the crisis.

Fed speak soon hit the newswires, and they warned a reduction in Quantities Easing (basically money printing) was coming. They also revealed an increase in interest rates was to be undertaken. The news prompted the first sell off beginning in January. The market anticipated the usual 1/4% increase we had often seen in the past.

Once that bitter pill was swallowed, the markets somewhat stabilized, only to be rocked again when the Feds upped the ante and starting talking about 1/2% increases. Investors appeared to shake that off after another market set back, and then the Ukraine problem hit the wires.

The first few weeks of late March and early April offered up some hope with some green numbers bouncing the markets and indeed, many key metrics signaled the worst might be over. The market looked like it had somewhat stabilized until the Feds once again raised the stakes and mentioned possible 3/4% increases were on the table.

Subsequently, Friday turned more than ugly. Investors likely saw red in their portfolio balances and probably more red then they have seen in a long, long time.

Keeping in mind, no one can predict market movements at any time, we can only guess as to what will happen next. Will we once again wash the bad news down with the elixir of time, and see the markets rebound? Or will the carnage continue and test the March lows once again, which would be another 900 or so Dow points? Could it even go lower?

We won’t know the answer until it is well in the rear view mirror.

One thing is certain. Inflation is bad and getting worse. Ditto for the Feds interest rate forecasts. Keep in mind, the Feds haven’t even done anything yet. So goes the effect of interest rate announcements on the market. Sometime the anticipation of the event causes more damage than the event itself.

The key to the whole thing will be how inflation responds to the Feds actions and whether the Fed’s current plan of interest rates increase does the trick, or if even stronger medicine may be needed.

Marc Cuniberti holds a B.A in Economics with honors from San Diego State University and is the host of Money Matters carried on 66 stations nationwide. California Insurance LIc# 0L34249. Call him at 530-559-1214 or visit http://www.moneymanagementradio.com


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