Reasons why stocks are crashing in 2022?
What are the reasons why the stocks are likely to crash in 2022 ? S&P 500 gained 27% last year, more than double the average annual return of 11%, including dividends, since 1980.
But if history has proven anything, it’s that volatility, recessions, and corrections are a normal part of the investment cycle and the cost of entry into what is arguably the greatest wealth creator on the planet. We may see a stock market crash in 2022, and one of the following 10 factors could be the catalyst that triggered it. A twenty-dollar paper aeroplane crashed and crumpled into a financial paper.
Perhaps the most obvious problem for Wall Street remains the coronavirus and its many variants. The unpredictability of the spread and virulence of new strains of COVID-19 means that a return to normal is still potentially a long way off. As each country seems to have its own approach to dealing with the pandemic, supply chain issues and workflow disruptions may remain on the agenda throughout the year. Wall Street loves certainty, and COVID-19 has made it nearly impossible.
Moderate inflation (say 2%) is perfectly normal in a growing economy. A growing company should have modest pricing power. However, the 6.8% rise in the consumer price index for all urban consumers (CPI-U) in November was the highest in 39 years in the US. When the prices of goods and services rise rapidly, businesses and consumers can usually not buy as much with their disposable income. Consequently, high inflation tends to slow growth and prompts a country’s central bank (the Federal Reserve) to tighten its monetary policy, which I will discuss later.
A printing machine that produces crunchy hundred dollar bills.
The third reason why the stock market could crash in 2022 is the aggressiveness of the Fed. For much of the past 13 years, the country’s central bank has promoted an accommodative monetary policy. In other words, he kept lending rates at or near historic lows and launched a series of quantitative easing (QE) initiatives designed to bolster housing market confidence and lower long-term Treasury yields. Starting in 2022, the Fed will cut its quantitative easing program several times and likely raise rates by 25 basis points.
As the access to ultra-cheap capital becomes increasingly limited, overall economic growth is expected to slow down. This is worrisome as growth stocks have pushed the S&P 500 higher since 2009.
As a general rule, it’s best to exclude the policy from your wallet. But from time to time, you need to keep a close eye on what is happening on Capitol Hill.
For example, Congress passed, and President Joe Biden signed into law during the first week of December a temporary funding bill to keep the federal government and its many agencies running. However, this bill only provides enough funding to last until February 18th. America’s two major political parties, the Democrats and the Republicans, have demonstrated that they are ideologically far apart, making another government shutdown quite likely this year.
Again, politics is usually not something investors need to worry about. However, the midterm elections are due in November, and the current political collapse in Congress could have tangible implications for business and the stock market going forward. At the moment, Democrats have a slight majority in the House of Representatives and the Senate.
However, that did not help President Biden’s “Build Back Better” initiative pass. Democrats who won their seats could pave the way for “Building Back Better” to become law in 2023 and open the door to higher corporate tax rates. Meanwhile, Republicans who win the seat will almost certainly kill any chance of Biden’s structure becoming law and eliminating higher corporate taxes.
Each of the past two years, China has been a headwind to Wall Street. Two years ago, the world’s second-largest economy by gross domestic product entered into a trade war with the United States. Meanwhile, concerns arose last year when regulators began cracking down on shares in the country’s biggest tech companies. It is still difficult to say what will happen in 2022. Weakness in major Chinese equities and potentially negative impacts on innovation and supply chains threaten US equities.
The hand is looking for a neat stack of hundred dollar bills used as bait in a mousetrap.
The seventh reason why the stock market could crash in 2022 is rapidly growing margin debt – the amount of money borrowed from intermediaries/institutions at interest to buy or sell securities. Over time, the nominal amount of debt outstanding often increases. However, a rapid increase in exceptional margin debt is usually bad news. As of November 2021, exceptional margin debt stood at nearly $919 billion. This is almost double the amount of margin debt during the pandemic recession less than two years ago.
In the long run, a stock market is a money machine. But in recent years, speculators have been accumulating in the cryptocurrency market. Watching Bitcoin earn up to 8,000,000,000% in just over 11 years, or the Shiba Inu meme coin earning 46,000,000% in 12 months, has led to a level of FOMO (fear of getting lost) that was not there before.
A crypto crash in 2022 is likely to hit stocks dependent on the crypto ecosystem and reduce investment capital for supplies. Magnifying glass sitting on financial newspaper reading market data zoomed in. Valuation is another clear issue for the stock market in 2022.