The stock market: annus horribilis?
Stocks in 2022 are off to a terrible start, with the S&P 500 down around 20% since the start of the year, and the SPI hovering -18%. Investors in Big Tech are growing more concerned about the economic growth outlook and are pulling back from risky parts of the market that are sensitive to inflation and rising interest rates. For investors, 2022 has been quite a roller coaster. Worries about inflation, rising interest rates, and Russia invading Ukraine in February sparked another wave of volatility for the stock market. All this fear and uncertainty about what’s coming next has led to whispers about the potential of another stock market crash—the first since the start of the coronavirus pandemic back in 2020. It’s also driven some investors to the sidelines. So, will we see the stock market crash during the rest of 2022? Let’s take a look at some of the major factors (with a cool, level head) to better understand where the market is going.
What is a stock market Crash?
A stock market crash is a sudden and big drop in the value of stocks that’s caused by investors selling their shares quickly. That drives down the value of stocks for other shareholders, who also start selling their shares to try to cut their losses. The end result is that people could lose a lot of the money they invested. To help us visualize how well the stock market is (or isn’t) doing, we look at indexes like the Dow Jones Industrial Average (DJIA), the S&P 500, the Nasdaq, or the Swiss Performance Index. Just by looking at a historical graph of one of these indexes, it is clear why the term crash is used.
What Causes a Stock Market Crash?
A stock market crash is essentially caused by two things: a dramatic drop in stock prices and panic. Here’s how it works: stocks are small shares of a company, and investors who buy them make a profit when the value of their stock goes up. The value and the price of those stocks are based on how well investors believe the company will do. So, if they think the company, they’re invested in is headed for hard times, they sell that stock in an attempt to get out before the value drops. The reality is, panic has just as big of a role in a stock market crash as the actual economic issues that cause it. Once investors see other investors selling off their stocks, they get pretty nervous. Then, stock values start to dip, and more investors sell their shares. Next thing you know, everyone is dumping their stocks, and the market is in a full-fledged crash. Look out below! The point here is this: The stock market’s value is 100% based on both perception and prediction (also using concrete tools, not just a gut instinct) of the future. No wonder it feels like such a roller-coaster ride!
Previous Stock Market Crashes: examples from history
Throughout history, the market has gone through a lot of extreme ups and downs. When we look back, we’re reminded that, yes, a market crash is a very difficult thing to go through, but it’s something we can and will overcome.
- The Great Depression, 1929: Over the course of a few days, the DJIA dropped nearly 25%. It took a little over a decade for the economy to get back to predepression levels. It was the industry from World War II that helped get things back up and running.
- The Stock Market Crash, 1987: The market lost 22.6% of its value in one day known as Black Monday.4 But within two years, it had recovered everything it had lost.
- September 11, 2001: Terrorist attacks in our country caused a major hit on the market, but it corrected itself super quick. Just one month later, the stock market had returned to September 10 levels and kept going up throughout the end of 2001.
- The Great Recession, 2008: The DJIA lost more than 50% of its value in a really short time. But after a couple of years, the market was stronger than ever before as we were basically in a bull market (a period of strong economic growth) from 2009 to just before the coronavirus crash.
- The Coronavirus Crash, 2020: In March of 2020, the COVID-19 pandemic triggered the most rapid global crash in financial history. Still, the stock market recovered ground pretty quick, and the year closed with record highs.8 In fact, economists are now saying the recession from the coronavirus crash was the shortest on record—only lasting two months.
Will the Stock Market Crash in 2022?
Some experts say we’re already in the middle of a slow stock market crash right now. Is that true? Let’s take a closer look at what’s going on. The current downward trend is indeed bad news, but hang on as the good news is coming. What’s driving the stock market’s latest tumble? There are many moving parts that go into any stock market crash. But in a nutshell, the Federal Reserve raised interest rates for the first time in years to try to stop the rapid rise of inflation sparked by supply chain shortages and the ongoing war in Ukraine. Translation? The economy is on fire, and the Fed is dumping buckets of ice water to cool things down . . . and now the stock market is reacting to that shock to the system.
Smart investors keep a long-term perspective. They don’t stress out over how their investments have performed in the past few weeks or what they’ll do in the next couple of months. They’re more concerned about what will happen five, 10 or even 20 years from now. And that helps them stay cool when everyone else is panicking. Savvy investors see that over the past 12 months (from May 2021 to May 2022), the S&P 500 is only down about 5%. And if you pull back even further, you’ll see that the stock market is still up 64% from where it was five years ago. Graph n. 1 refers to the S&P 500, and graph n.2 to the Swiss SPI.
Here’s the lesson: when it comes to investing, keeping a proper perspective is the key. The only folks who get hurt on a roller coaster are the ones who jump off before the ride is over, so don’t jump off!
What’s going to happen next?
But what’s in store for the rest of 2022? Will the markets continue to tumble and lead to another recession? Or will the markets bounce back and recover? All we can do is look at the things that will influence the market and your investments throughout the rest of the year
Reasons to feel cautious about the stock market in 2022:
- High inflation – Between all those stimulus checks and supply chain issues, we’ve seen a dramatic increase in the price of, well, everything—especially in grocery stores and at the gas pump, which has led to investors being cautious and consumers spending less.
- Rising interest rates – In an effort to fight inflation, the Federal Reserve started raising interest rates in early 2022—and there could be more rate hikes on the way soon. While this could slow down inflation, it could also trigger another U.S. recession.
- Tensions in Europe – Russia’s invasion of Ukraine sent shockwaves around the world and could cause investors heartburn over the next few months. But if history shows us anything, the stock market usually recovers and is higher a year after major geopolitical events.
Reasons to Feel Optimistic About the Stock Market in 2022:
- COVID-19 fading – As the coronavirus crisis eased, putting the Delta and Omicron variants in the rearview mirror, we’ve already seen more optimism, movement and spending.
- Unemployment falling – In April 2022, the unemployment rate remained steady at 3.6%, that’s the lowest level since February 2020 right before the pandemic started to wreak havoc on the U.S. economy.
- New industries growing – Specific industries, tech, e-commerce and biotech gained tons of ground during the pandemic and will continue to grow and give investors reason to feel confident.
We can run numbers and make predictions all day long, but at the end of the day, we have no idea what’s going to happen for the rest of 2022, no one does.
Marcello Tedeschi, July 26, 2022
