5 Takeaways From the Stock Market Over the Last 4 Years

Over the past few years, the New York Stock Exchange has looked more like Spain in July, as the running of the bulls has become a regular event on the world’s largest stock exchange.

The tech-heavy Nasdaq Composite Index finished above 20,000 for the first time during the Dec. 11 trading session.

Earlier this month, the blue-chip Dow Jones Industrial Average and the S&P 500 closed above 45,000 and 6,000, respectively—both record highs.

President Joe Biden has also celebrated substantial gains as several asset classes have rocketed to never-before-seen levels.

In September, he touted his economic record by citing a “record high stock market” and “record high 401(k)s.”

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Bitcoin recently surpassed the long-awaited $100,000 level.

In October, gold prices reached an all-time high of $2,800 and have hovered around $2,700 since.

This upward trend did not spring out of nowhere. The leading benchmark indexes have been on a tear since the coronavirus pandemic, though there have been bumps on the path toward uncharted territory.

Since touching the bottom of the pandemic-fueled market crash in March 2020, the Dow Jones and the Nasdaq have surged about 136 and 192 percent, respectively. The S&P has rallied approximately 168 percent.

In addition to stocks, the public again fell in love with cash as money markets—short-term debt investments and cash accounts—became attractive.

For the first time in two decades, yields touched the 5 percent market, providing investors with hefty risk-free returns.

Cash inflows total nearly $7 trillion and have continued to receive sizable retail funds as the Federal Reserve cuts interest rates.

A Bear Tranquilizer

While retail traders and institutional investors may be swimming in an ocean of green ink, it might be easy to forget about the bear market—where stocks or indexes fall 20 percent or more—that occurred in 2022.

The stock market decline two years ago lasted nine months, and it was Wall Street’s worst annual performance since the 2008 global financial crisis. Many causes fueled bearish conditions.

Market watchers overwhelmingly anticipated a recession, driven by the Federal Reserve’s monetary tightening efforts that began in March of that year to combat inflation.

Additionally, investors were growing concerned over emerging markets—particularly China’s COVID-zero strategy—and the war in Eastern Europe.

By late 2022 and early 2023, euphoria began saturating the New York Stock Exchange’s trading floor. Investors became optimistic about global disinflation, central banks signaling lower interest rates ahead, and the AI boom stimulating the tech sector.

Inflation Distortions

When assessing the stock market, investors and analysts will shine a spotlight on nominal (non-inflation-adjusted) gains and typically overlook the inflation impact.

In recent years, nominal gains have highlighted U.S. stock market-shattering records.

However, the numbers are slightly more conservative when the returns are adjusted for inflation.

This diminishes the actual value of investors’ gains, requiring greater investment returns to try to keep up with the cost of living.

Hedge fund managers might not explore the inflationary effects on earnings. However, middle-class households seeking to retire with a handsome nest egg might need to consider this component.

Milton Friedman Revisited

Eminent economist Milton Friedman stated that monetary policy operates with a “long and variable lag,” meaning that the effects of the Federal Reserve’s actions may not be felt immediately.

Did the Fed’s response to the pandemic alter this decades-old concept?

Economists have debated the Milton Friedman rule now that the U.S. central bank provides forward guidance, telling the public what officials will do in advance. In the past, this was a guessing game for the financial markets.

On Mar. 15, 2020, the Fed slashed interest rates to zero percent and launched an enormous $700 billion quantitative easing program to cushion the economic blows of the pandemic.

A little more than a week later, the stock market reached a bottom and ignited its upward climb. In the following years, assets across the board surged.

Heading into 2022, the Fed started telegraphing that it would soon tighten monetary policy by raising interest rates and shrinking the nearly $9 trillion balance sheet.

Within weeks, investors prepared for this climate of higher rates and less accommodative policy, initiating the bear market on Jan. 3, 2022.