The beginning of 2022 has been challenging for investors. Cryptocurrency prices have plunged, with Bitcoin losing more than 30% of its value. In addition, the Federal Reserve intends to raise interest rates, and the stock market is falling, with tech stocks falling the most. This has made many investors worried that the stock market is heading for a fatal crash.
It would be too early to say the stock market has crashed. However, we can say that right now, it is in bear territory, more like a “correction” if I must say. That means stock prices are going down. A crash is usually precipitated by a major catastrophic event, an economic crisis, or a long-term speculative bubble coming to an end. We could be getting close to one of these but not yet. Here are some reasons that could precipitate a stock market crash.
If the COVID variants continue to spread, this could trigger an economic crisis. Because the spread of COVID-19 is unpredictable, a financial crisis is on the way. For example, we saw supply chain disruptions in 2021 that cut short the profits of several companies. If this continues, it will herald the crash of the stock market.
Another reason the stock market could crash is if the inflation we are experiencing persists and increases. Moderate inflation levels, like 2%, in an economy are expected. But of recent, we have seen persistent rising inflation. In November, there was a 6.8% increase in the Consumer Price Index for all Urban Consumers (CPI-U),a 39-year high for America. If inflation continues to skyrocket, businesses' and consumers' buying power will reduce. This brings about slow growth, and the Feds will be forced to tighten monetary policy.
In 2022, we could see the Fed taking a divergence from its dovish monetary policy and winding down its quantitative easing programs. This will likely raise rates. Increased rates mean access to cheap capital will be scarce, and many businesses will struggle to survive. That would have a debilitating effect on the economy, and since the stock market is powered more by growth stocks, especially the S&P 500. With growth stocks going bankrupt, the stock market could crash.
We are closely watching the China tech crackdowns. For the past two years, the two largest economies in the world, the United States and China have been having a trade war. Now, American companies will feel the pinch as China has begun cracking down on tech companies. This could weaken key China tech stocks. Due to the negative impact on supply chains and innovation, American tech companies, which have powered the stock market growth in recent years, will be seriously affected.
You cannot also leave politics out of the calculation. What happens on Capitol Hill can affect the stock market. There is a possibility that a government shutdown is looming come February as Democrats and Republicans are at each other’s throats. Also, this year we will have the midterm elections. If Republicans win more seats in congress, they would indeed plug into the President’s plans to make him look bad. So, politics is another consideration.
This year, other factors could necessitate a stock market crash, and we are watching the market. But you need not be anxious over a stock market crash. History has demonstrated that volatility, crashes, and corrections are typical for any healthy economy. The stock market will surely rebound from its recent lows. You will only lose money in a crash if you sell. So, if the stock market crashes, just be patient and hold. It will recover.