With stocks experiencing a volatile year full of brutal pullbacks, doomsday theories of an impending stock market crash are floating around Wall Street. Will the stock market crash in 2022?
Well, depending on who you ask, you’ll probably get vastly different answers. The bears certainly have reason for their sheepishness, but the case against a crash remains strong.
A stock market crash is defined by a rapid and unexpected drop in share prices. It’s typically reflective of a loss in consumer confidence, as stocks only drop like that when a large number of investors “panic sell” substantial amounts of stock. Such an event doesn’t typically occur without precedent or justification.
The question then remains, what could push investors to sell off stock en masse? A recession would be a good starting point.
When the greater economy takes a turn for the worst, investors tend to shy away from equity markets. If you believe businesses are going to perform poorly in the short or long term, it makes sense to reallocate funds toward more guaranteed returns until the water’s a bit warmer.
Indeed, with Series I Savings Bonds yielding a nearly 10% interest rate, should the markets begin to slide, investors may decide to transfer their funds into the more stable, and comparably high-yielding, bond market.
Will the Stock Market Crash?
With the fate of stocks at least partially dependent on the health of the greater economy, the Federal Reserve has a balancing act ahead of it. Fed leadership has repeatedly iterated the importance of lowering inflation, even hinting at the extraordinary measures it was willing to undergo for such a purpose.
The Fed has already hiked interest rates several times this year, and ceased its pandemic-related bond-buying program. The test is whether the Fed will be able to further tighten the monetary environment — in order to curb inflation — without spiraling the country into a recession.
The S&P 500 is down about 20% this year. This comes largely as a consequence of supply shortages stemming from Russia’s invasion of Ukraine, China’s Covid-19 shutdowns, and fear over impending interest rate hikes. With that said, recent weeks have been somewhat positive for equity markets. Last week marked the second-best week for stocks all year. The S&P and Nasdaq Composite climbed 6.5% and 7.5%, respectively. This lead some investors to predict a stock market rebound was on the way.
Whether stocks will experience clear skies through the year remains to be seen. Regardless, a stock market crash will likely be the consequence of forces far more malicious than a few unfortunate earnings calls.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
