Global stock market indices outperformed in 2021, but will this trend continue?

As of late, indices are becoming a predominant factor in traders’ and investors’ portfolios. All around the world, market watchers are monitoring popular indices such as the S&P 500, DAX 40, and FTSE 100, mainly because these assets can provide an overall picture of the appetite for stocks.

Additionally, indices are now popular trading instruments covered by CFD brokers like Axia, a regulated company offering online trading services on a global scale. Thanks to elevated liquidity, these instruments now come with tight spreads, as well as the option to get in or out of the market at the trader’s desired price. Considering indices are covered intensely by the media these days, their performance can have a meaningful impact on the broad risk sentiment, even towards stocks that are not part of any index. A closer look at the prospects for indices in 2022 is thus a helpful tool to anticipate future market moves, at a time when inflation, waning fiscal/monetary stimuli, and rising social tensions have such a broad effect on stock markets. 

Despite the overall volatility, 2021 turned out to be a record-breaking year for stock market indices. The focus remained on American indices throughout the year, with all three major names ending in green territory. S & P 500 was the most favored, given the heavy inflows into big tech, which pushed the index higher by 26.9%.

Nasdaq Composite, also a tech-heavy index, rose by 21.4% last year, with tech stocks topping during Q4, on the back of rising prospects for interest rate hikes. The Dow Jones Industrial Average advanced 18.7%, with investors rotating into cyclical sectors such as financials, industrials, energy, and materials.

A confluence of factors supporting stocks

The impact of the global pandemic on economic activity pushed policymakers to use aggressive fiscal and monetary tools, with the goal of making sure people can keep their heads above the water through these rough times. These include subsidiaries and grants to households and businesses, as well as rapid interest rate updates and flexible taxation policies.

In this atmosphere, traders working with brands like Axia hold a favorable position, when compared to investors with a direct linkage to the markets themselves. The massive inflows into stocks, most of which are linked to publicly-listed companies, naturally have also had a positive effect on indices and the sentiment towards them. Low interest rates, for example, meant cheap access to capital, correlated with a surge in margin trading on stocks worldwide.

At the same time, interest from retail traders spiked, as Axia and other brokerages benefited from record trading volumes, coming from both market veterans and novice traders with no prior experience.

Each dip in indices valuations is a buying opportunity for many these days. TINA (“there Is no alternative”) seems to be the main narrative, and as long as interest rates remain low, stocks are an attractive venue for capital.

Wall Street performance in 2022.

Q1 2022 – in contrast with last year’s performance

Following two years of consecutive gains, 2022 fails to continue on the same path so far. The Nasdaq already dropped by 20% before finding bids, with investors massively cashing out of tech names, anticipating a robust response from the Federal Reserve to elevated inflation figures.

The Dow Jones Industrial Average was the least hit, down approximately only 10% currently, mainly thanks to cyclical components like Goldman Sachs, 3M, Chevron, Caterpillar, and JP Morgan Chase. Higher interest rates and energy prices are now shifting attention to different sectors, leaving tech in a difficult position.

The first quarter of 2022 is shaping up to be a negative one. However, there’s still a month left so it would not be wise to jump to conclusions. The military conflict between Ukraine and Russia complicates the picture even further, dampening economic prospects and keeping inflation expectations elevated for at least a couple of months ahead.

Where are indices headed?

Faced with these headwinds, stock market indices are in a tough spot. Geopolitical tensions are not something the markets are unfamiliar with, and most of them even turn out to be buying opportunities. Nevertheless, this time the context is slightly different.

Even if the conflict in Europe’s days are numbered (which, at the time of writing, doesn’t seem to be the case), investors might shift their focus back to monetary policy normalization when making financial decisions. In 2021, low interest rates were a driving force for stocks and indices, but a reversal in policy can have the opposite effect.