In the case of a stock market crash, the value of stocks drops sharply due to investors selling their shares rapidly. Consequently, that drives down the value of stocks for other shareholders, who also attempt to trim their losses by selling their shares.
Consequently, investors stand to lose a significant amount of capital. If we wish to understand how well the stock market is or isn’t doing, we should analyze indexes such as the Nasdaq, S&P 500, and Dow Jones Industrial Average.
You can see why we call it a crash if you look at one of these indexes’ historical graphs. That’s like watching a plane plunge. Investors have had quite the roller coaster ride in 2022. A wave of volatility followed inflation concerns and increasing interest rates in January and the Russian invasion of Ukraine in February.
Stock markets have been whispering about the possibility of a new crash since the beginning of the 2020 Coronavirus pandemic. Is there still a risk of a stock market crash in 2022? Here are 6 reasons to fear a crash this year.
1) High Inflation And The Spread Of The New Corona Variants
One of the most pressing concerns for Wall Street remains the Coronavirus. COVID-19 strains are unpredictable and virulent, so a return to normal is still potentially a ways away.
There may be supply chain issues and workflow disruptions as each country tackled the pandemic differently; COVID-19 has made Wall Street’s need for certainty impossible.
2% inflation is normal in a growing economy, and prices should remain modest in a growing company. However, the 6.8% increase in September’s Consumer Price Index for All Urban Consumers (CPI-U) was the highest in 39 years.
Consumers and businesses cannot buy as much with disposable income when prices rise rapidly. Therefore high inflation tends to slow growth and encourages the Federal Reserve to tighten its monetary policy.
2) Congressional Deadlock And Bloodthirsty FED
Generally, it would help if you avoided politics in your portfolio. However, Capitol Hill decisions need to be closely monitored occasionally. A stopgap funding bill was passed and signed by President Joe Biden in December’s first week to keep the federal government running, and it only funds the government through Feb. 18.
Democrats and Republicans are miles apart ideologically, so another government shutdown seems likely this year. Stocks could crash in 2022 if the Fed turns hawkish.
The national central bank has promoted chiefly dovish policies for the past 13 years. It has kept lending rates at or near historic lows and has undertaken numerous quantitative easing (QE) initiatives to boost confidence in the housing market.
In 2022, the Fed will wind down its quantitative easing program, and rates will rise by 25 basis points a few times. We expect slower economic growth as access to ultra-cheap capital becomes more limited. The S&P 500 has been growing since 2009 on the back of growth stocks.
3) Tech Crackdown In China Tightens
For Wall Street, China has been a headwind each year for the past two. Two years ago, the world’s second-largest economy entered a trade war with the U.S. Regulators began cracking down on technology firms last year, raising concerns.
There is no sign yet of regulators loosening their grip on China’s leading innovators in 2022, which is tough to predict for the world’s No. 2 economy. Stocks in China are weak, and potentially negative changes can affect supply chains and innovation.
4) USA’s Midterm Elections
Day-to-day politics doesn’t usually affect investors. However, the November midterm elections can have a tangible impact on businesses moving forward, which explains the current political breakdown in Congress.
House and Senate Dems have a narrow majority for now. The Build Back Better initiative did not succeed despite this. A Democratic pick-up in the midterm elections could pave the way for Build Back Better to become law in 2023 and lead to higher corporate tax rates. If Republicans pick up seats, Biden’s framework will never become law, and higher corporate tax rates will disappear.
5) Cryptocurrency Crash And The Margin Meltdown
The stock market makes money over the long run, and the cryptocurrency market has been flooded with speculators lately. There is a new level of FOMO (fear of missing out) after seeing Bitcoin gain 8,000,000,000% in a little over 11 years, and Shiba Inu gain 46,000,000% in 12 months.
There has been no real separation of the crypto market from the stock market. Moreover, some crypto investors invest in stocks as well. Stocks connected to the cryptocurrency ecosystem are likely to suffer, as will investment capital for equity.
The market may crash in 2022 because of rapidly rising margin debt — that is, the amount of money borrowed with interest from brokerages and institutions to buy and sell securities at a discount.
Increasing margin debt is not uncommon, and rapid growth in margin debt is troublesome. Around $919 billion was outstanding in margin debt as of November 2021. During the pandemic low, margin debt was nearly double this amount.
Additionally, a 60% increase in margin debt in a single year has only occurred three times since 1995. The dot-com bubble burst before the financial crisis and just before 2021.
6) History’s Habit Of Repeating Itself
The stock market could crash if history repeats itself. There have been nine bear markets (i.e., declines in the S&P 500 of at least 20%) since 1960.
In the 36 months following the previous eight bear market bottoms, not including the coronavirus crash of 2020, there have been at least two corrections of at least 10%. As a result, recovering from a bear market bottom is a bumpy process.
The S&P 500 has not experienced a double-digit percentage drop since the bear market bottom 22 months ago, and history suggests it will happen sooner rather than later.
It is about being patient and thinking long-term here. Keep reminding yourself of what you know to be true no matter what happens in 2022. Think of your future, family, and dreams when making investment decisions. Focus on what you can control and stay positive to accomplish that.
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
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Tim Thomas holds no positions in the stocks, ETFs, mutual funds, forex, or commodities mentioned.
This post was produced and syndicated by Tim Thomas / Timothy Thomas Limited.
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