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Analysis

Stock Market Crash Prediction – What Could Happen to the Market in 2022

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Following more than two years of high-level volatility, brought about a series of unprecedented events, including a global health pandemic, soaring inflation rates, and, more recently, a full invasion of a sovereign European nation – what does the rest of this year have in store for the markets?

In this article, we will be taking a look at the immediate and short-term future, as we analyse what investors can expect to see in 2022, including offering our own stock market crash prediction for the months ahead.

What is a Stock Market Crash?

A stock market crash is a sudden and often unexpected drop in the price of stocks, when investors sell off their shares quickly, leading to a decrease in the value of stocks for other shareholders, who then also begin to sell their own shares.

While there is no set formula for determining a stock crash, it is generally considered to involve a double-digit percentage drop in a stock index over a period of a few days. They tend to be a side effect of a major catastrophic or economic event, but they can also be caused by a collapse of a long-term speculative bubble.

Famous previous examples of a financial crash include the Great Depression in 1929, the ‘Black Monday’ of 1987, the Great Recession of 2008, and the Coronavirus Crash in 2020. The latter event triggered one of the fastest crashes in history, with the price of stocks going down by 34%, but the markets soon recovered, even ending the year with record highs.

Potential Causes of a Financial Crash in 2022

  • High Inflation

Economies around the world have experienced decades-high inflation levels in the first quarter of the year, with wholesale inflation for March peaking in all of the major economies of the world, including reaching 11.2% in the US, and 7% in the UK. 

The US consumer price index increased 8.5% in March from a year ago, representing a 41-year high, with the average person having to swallow soaring fuel prices and significantly higher grocery costs on staples such as meat and poultry, fruit and vegetables, and cereal.

Should the inflation rate continue to peak in 2022, we could see lower returns on the stock market, as higher inflation is likely to lead to higher interest rates, lower economic growth and lower dividends, which is bad news for the stock market.

  • A Hawkish Fed

A knock-on effect of the record-high inflation levels could be the way in which the US Federal Reserve (Fed) responds to the crisis, typically in the form of raising interest rates. For much of the last 13 years, the Fed has favoured a dovish monetary policy, i.e., keeping lending rates at or near historic lows.

It has also enacted a number of quantitative easing (QE) initiatives designed to store up confidence in the housing market and weigh down long-term Treasury bond yields. But this policy path looks set to change in 2022, with the Fed already approving a 0.25 percentage point rate hike, the first increase since December 2018.

Further rate hikes are expected over the coming months, which means that, as access to ultra-cheap capital becomes scarcer, overall economic growth will experience a slowdown. This is a concern for the markets because growth stocks have powered the S&P 500 higher since 2009.

  • Cryptocurrency Crash

The emergence of the cryptocurrency market has seen some astonishing growth numbers come with it, with Bitcoin experiencing an 8,000,000,000% gain in a little over 11 years, while the Shiba Inu coin has grown by 46,000,000% in just 12 months.

Typically it is the stock market that is the money generator in the long run, but it has been the crypto market where investors have flocked to in recent months and years. However, the crypto market has been unable to detach itself from the stock market and define its own identity. 

Moreover, a significant number of crypto investors also add stocks to their trading portfolios, which means that any form of crypto crash could weigh down on stocks that are currently dependent on the cryptocurrency ecosystem, as well as reducing the overall investment capital for equities.

Final Thoughts

When it comes to making a stock prediction for 2022, it can be difficult for investors to judge, due to the many external factors affecting the markets – most notably when unpredictable events occur, like disasters, health pandemics, and wars.

As far as this year is concerned, there are several potential causes of a stock market crash, especially as central banks look to address the surging inflation rate. Meanwhile, the future fortunes of the crypto market could have a secondary effect on the strength of the stock market, due to their close ties.

Keeping up-to-date with the very latest market-related news and events is an important part of any well organised trading plan, as getting ahead of a sudden downturn can be the difference between a good and bad investment, and can help to prevent heavy losses in the event of a full stock market collapse.

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