Is there a market crash coming this year? Will the stock market recover the value lost in the past six months?
No one can say with complete certainty how the markets will perform through this year. It’s possible that we will see a stock market crash in 2022 due to complex world events, the current volatility in the markets, and how investors react to these pressures. It is not, however, inevitable.
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A Stock Market Crash: What it Means and How it Happens
A stock market crash is defined as the market losing a significant amount of value – generally 20% or more – in a very short time. A crash occurs when investors sell a high volume of stock very quickly, driving down the value of the stocks.
How Do Market Crashes Happen?
Investors might sell their stocks for a wide variety of reasons, but a significant selloff can cause other investors to panic and dump their shares too. If enough people sell at the same time, stocks lose their value. In short, by trying to avoid losses, investors themselves can cause market crashes.
The more people who jump into a selling frenzy, the faster the value of the stock will nosedive. If the selling is widespread, it can bring the whole market crashing down.
Why Do Crashes Happen?
Sometimes a particular stock will be sold off based on fundamental business information. Perhaps a new product release disappoints, a popular CEO quits unexpectedly, or some dishonest practice of the company is exposed. If there is surprising news about a company its stock value will be affected, sometimes harshly.
Generally, the market is resilient enough to withstand bad news about one company.
The market as a whole is in danger of crashing when larger problems disrupt overall market stability or when people perceive world events as overwhelmingly worrisome or threatening. If the context of the world is uncertain enough, the markets become volatile and susceptible to devastating market-wide sell-offs.
Stock Market Crash 2022: When Will It Happen?
Everything in the markets is based on perception, and crashes occur when perspectives shift suddenly and cause investors to panic.
Normally, people invest because they believe values will go up, or they sell short because they believe stocks are overvalued and will be corrected in the future.
Predictable markets remain stable. When investors understand the trends, they are more confident in their investing decisions and less susceptible to sudden decisions. Unfortunately, when events shock the system, stability evaporates and markets can get very rocky.
- Uncertain times create volatile markets
- People react to surprising events
- Fear creates panic, which can cause chaos and crashes
Macro Trends Affecting the Stock Market in 2022
Today, we live in a global economy, and the market is dependent on events all over the world.
COVID-19 and Inflation
A recent example is the COVID-19 pandemic and the resulting inflation brought on by a recovering economy. Markets worldwide suffered from the pandemic’s effects and are trying to return to normal. All major economies are now wrestling with inflation and skyrocketing fuel prices.
Supply Chain Issues
Here in the United States and much of the rest of the world, COVID restrictions have eased as the virus has waned. The demand for goods has skyrocketed in conjunction with a shortage of labor, causing massive supply chain issues.
In trying to cool off the surge in the economy, the Fed has already raised interest rates and promises more increases, causing other ripples in the US markets.
Russia’s War in Ukraine
Since February of 2022, we’ve also witnessed the Russian invasion of Ukraine. This war has already caused unthinkable destruction across this small European country and devastating violence against the Ukrainian people.
No one knows when the war will end, and all of Europe is rendered less safe and less stable in the process. The invasion has exacerbated fuel price increases across the globe.
Grain and Fuel Supplies
Russian occupation now also appears to be threatening the world’s grain supply. Even amid the fog of war, it’s clear that Ukrainian farmers are struggling with their crops. It has been widely reported that Russia is stealing stores of Ukrainian grain and shipping it out of the country to unknown destinations, potentially increasing world food shortages.
The war is a troublesome addition to existing international issues.
Investor Response Will Determine If We See a Stock Market Crash 2022
There are many moving parts in the global situation today, causing unprecedented uncertainty. They overlap and interact in complex ways, causing an unpredictable combination of economic trends. All of these factors weigh on the stock market.
What moves markets directly, however, is how investors react to these events.
Perception drives prices up or down. Optimism pushes prices higher and panic drives them down dangerously fast. It’s unsurprising in today’s world that the stock market is experiencing a high level of volatility.
Previous Crashes: What They Tell Us About a Market Crash 2022
To predict the future, it’s helpful to look at what has happened in the past. You’ve quite likely lived through several markets crashes already.
We’ve all read about The Great Depression, which kicked off in 1929 with a 25% drop in the stock market. The crash happened over just a few days, but it took about ten years for the economy and the stock market to recover.
It was a painfully slow process to come back from that event. The Great Depression title was also due to how long it took for stocks and the wider economy to recuperate.
How Often Has the Market Crashed Before?
Since 1929, there have been over a dozen market downturns of 20% or more in a short time. Many of these downturns were triggered by national or world events. Some were caused by human nature – the greed of wild speculation, questionable business practices, and lack of regulation. There are many recent examples:
- The dot com bubble burst in 2000, causing widespread losses.
- Markets lost 20% after the 2001 Trade Center bombings.
- The subprime loan debacle of 2008 led to massive defaults, bank failures, and market losses of 50%.
- Bitcoin lost 45% of its value in 2018, dragging markets down.
- The 2020 market dropped 34% due to the COVID-19 lockdowns.
What do all of these crashes have in common? World events, greed, and human error caused instability, making markets volatile. In the ensuing uncertainty, investors panicked, causing devastating sell-offs.
After a Crash, Will the Market Recover?
There is an interesting and reassuring lesson from this history as well: Markets do come back from crashes. In every crash since the end of The Great Depression, the markets have recovered their value in a fraction of the time it took to come back from the 1929 crash.
In each case, it has taken about two years or less – in some cases, a matter of just months – for markets to rebound and return to their pre-crash values.
How To Prepare and Protect Your Money in a Downturn
The markets are down about 20% from recent highs; we are in a bear market. World events are unpredictable and no one can definitively say what will happen tomorrow.
Conditions certainly exist in which a crash could occur. Some argue that due to the loss of value over the past six months, we are already experiencing a sort of slow-motion stock market crash.
What can you do to shield your investments from losses in these turbulent times?
1. Keep a level head.
Remember that if and when stocks take a nose dive, they recover; in the past 80 years, they have a solid track record of recovering very quickly. There is no need to panic when the markets wobble.
2. Invest for the long haul.
You can drive yourself to distraction by checking your portfolio constantly. Plan long term – years, not weeks or months – with your investments, and remain patient when the market is rocky.
3. Trade consciously.
Make trading decisions based on business fundamentals and performance, not short-lived market trends or hype. If you are invested in companies that are producing returns and growing more or less as expected, don’t dump them just because they’ve lost a few points in a market downturn.
4. Seek professional advice.
With the complicated market pressures of 2022, it’s a great time to talk to an investment advisor about your long-term goals.
Is a Market Crash Coming in 2022?
Will the stock market crash in 2022? Maybe. If so, will the stock market recover? History says it will.
No one can predict what tomorrow will bring, but we can see from past market events that the stock market adjusts to changes in the world and recovers quite readily from shocks and surprises. As an investor, you’ll do well to stay calm when others panic.
If we experience a stock market crash this year, you’ll do much better getting through it if you can maintain a practical perspective, keep your long-term focus, and stick to your investment goals.
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