Next Stock Market Crash Prediction

The March 2020 market crash stunned economies around the world. It occurred suddenly and without warning when COVID-19 led to business closures and required people to stay in their homes. The crash was especially shocking because less than a month earlier, the S&P 500, the Dow Jones Industrial Average, and the NASDAQ Composite reached record-breaking highs.

Governments and monetary policy-makers in the United States and elsewhere took immediate action to turn the financial disaster around. For example, the US government passed the CARES Act to deliver direct economic relief for individuals and businesses, along with funding for a number of COVID-specific initiatives to reduce the impact of the virus.

Many sectors of the economy recovered within a matter of weeks, and the market went on to hit new all-time highs several months into the pandemic.

Of course, this wasn’t the first market crash to devastate an economy, and it certainly won’t be the last. Though the March 2020 crash was reversed rather quickly, some say that the recovery was entirely dependent on government stimulus. With that gone, there is growing consensus that the next stock market crash will occur before the end of 2022.

History may not repeat but it does rhyme. So what does the past tell us about the odds of the next stock market crash occurring soon?

How Much Did The Market Drop in 1929?

Understanding the circumstances that lead up to stock market crashes makes it easier to predict when another might occur.

The March 2020 crash was unique in that it didn’t follow the same pattern as previous crashes. However, aside from that example, economic historians have identified specific factors that contribute to market drops by studying more than a century of data.

The most devastating market crash is still considered to be the Great Crash of 1929. This event sparked the Great Depression, prompted record unemployment rates, and plunged huge swaths of the population into deep poverty.

The decade that preceded the 1929 market crash is often referred to as the Roaring 20s because it was a time of rapid economic growth. The period marked significant social change, such as the advancing women’s suffrage movement and the Harlem Renaissance.

Technological advances prompted an expansion of industry, and there were motion pictures and radio broadcasts to spread the word. Many social and business traditions fell by the wayside, and it was widely considered a time of transformation.

Though Prohibition outlawed alcohol in the 1920s, there were plenty of opportunities to have fun. People made the most of the widespread sense of prosperity.

Between August 1921 and September 1929, the Dow Jones Industrial Average went from 63 to 381. The market peaked on September 3, 1929, but less than two months later, the bottom fell out. On Thursday, October 24th, the trading day started with the Dow approaching 306. Almost immediately, it dropped by 11 percent.

Rapid action by Wall Street bankers temporarily stopped the decline, and that Friday wasn’t so bad. However, on Monday, October 28th, the Dow lost 13.47 percent of its value and closed at 260.64. It went down another 11.7 percent the next day, closing at 230.07, and within two weeks, it was down nearly 50 percent from its September high.

Those first three days of market declines are now referred to as Black Thursday, Black Monday, and Black Tuesday, respectively.

How Do Market Crashes Happen?

In retrospect, historians have attributed the 1929 market crash to rising interest rates, overly-easy access to credit, and general overconfidence among investors.

It took years for the market to fully recover from this crash, as terrified consumers reduced their spending and investors avoided exposing themselves to additional losses.

Why Did The Market Crash in 1987?

The stock market crash of 1987 was similar to the 1929 market crash in some ways. There was another Black Monday, this time on October 19, 1987, when the Dow Jones Industrial Average dropped 22.6 percent. At the time, it was the largest drop in history.

Until October 1987, the 1980s were marked by rapid economic expansion. From August 1982 until August 1987, the Dow increased from 776 to 2,722. In 1987 alone, it rose 69 percent from January to August.

The cause of the 1987 crash was a chain of events that began on October 14, 1987. A tax bill was introduced to reduce or eliminate tax advantages that companies enjoyed when financing mergers and leveraged buyouts, and on the same day, high trade deficit figures were announced. That resulted in the devaluing of the US dollar and an increase in interest rates.

Two things happened next. First, computer models for institutional investors insisted that large sales were a must, and second, investors began to panic. They redeemed mutual fund shares at such a rapid rate that they exceeded the mutual funds’ cash reserves. On Black Monday, there was a massive sell-off that turned into a market crash.

What Caused The Stock Market Crash Of 2008?

Unfortunately, October seems to be an unlucky time for the stock market. In 2008, after a series of economic disasters, the Dow closed below 10,000 on Monday, October 6th. It was the first time it had closed below 10,000 since 2004.

The financial crisis that sparked the Great Recession can be broadly attributed to deregulation. Specifically, during the years leading up to the crisis, lenders had been far too generous with mortgage approvals. People were able to borrow more than they could afford to pay back through programs that didn’t require income verification or any other sort of documentation.

Easy access to credit increased demand in the real estate market, and home prices rose rapidly. When those prices dropped, homeowners were “underwater” with mortgages they couldn’t afford to pay. Defaults were rampant, and those who invested in subprime loans lost a fortune.

Will The Stock Market Crash In 2022?

Now in 2022, there are signs that the next stock market crash will occur before the end of the year. Programs put in place to prop up the economy after the March 2020 market crash have expired, interest rates are going up, and inflation is at a 40-year high.

On top of that, the Russian invasion of Ukraine has prompted an increase in energy prices. Higher fuel costs contribute to higher prices for everything else, as nearly every item that makes it to a store shelf must be transported a long distance to get there.

Inflation in general and gas prices in particular are straining the budgets of average consumers. They are buying less, which means – at best – muted economic growth.

Some industries boomed during the pandemic – for example, the tech companies that provided infrastructure and software for virtual work, online education, and digital entertainment. That growth has slowed, so those companies will no longer contribute as meaningfully to a general rise in the larger market.

Meanwhile, many small businesses closed forever during the pandemic, and certain industries continue to struggle. For example, airlines have not yet recovered, and rising fuel prices will make their situation even more challenging.

All of these factors suggest that an economic recession is coming. Does that mean a market crash in 2022? Not necessarily – but it’s not out of the question given current world events. A new strain of COVID-19, a worsening Russian war in Ukraine, a natural disaster, or another unexpected issue could prompt a market crash at any time.

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