Will The Stock Market Crash in 2022?

Even in the best of times, watching the stock market rise and fall can be a stressful proposition. During more hectic times – like a bear market that occurs in the middle of a pandemic – it can be absolutely terrifying. Indeed, many have watched the stock market movement of the past few weeks with a huge amount of trepidation, as the market has fallen somewhat significantly of late. This begs the question: Will the stock market crash in 2022?

Before answering that question, let’s take a look at the basic facts. 

What Is The Definition of a Stock Market Crash?

The term “stock market crash” is often thrown around, but there isn’t exactly an agreed-upon meaning of it. Generally speaking, it refers to a major drop in the value of a stock market, such as the NYSE or NASDAQ. It is usually used to refer to an abrupt drop. This drop can be used in response to world events (such as a pandemic or terrorist attack). It often occurs with little to no warning.

There have been many crashes over time, including the crash of 1929 (which influenced and brought on the Great Depression) and Black Monday (the stock market crash of 1987 that saw the stock market lose 22.8% of its overall value).

So-called “circuit breakers” have been put into place that halts crashes and are meant to pause trading if losses become too severe. These circuit breakers acknowledge the role that emotions and fear can play in stock market trading, and they are attempts to allow traders to pause trading and thus halt the momentum of a crash.

As you can see, unlike other financial terms, there is no exact definition of a stock market crash. However, the old axiom, “I’ll know it when I see it” seems to apply. Stock market crashes are often identified after the fact. 

Will Fed Rate Hikes Cause A Crash?

The most recent round of stock market value losses occurred after the Federal Reserve said that they would end post-COVID stimulus efforts earlier than anticipated. They also proposed the potential interest-rate hikes, with three potential increases currently being considered.

Both of these proposals had an immediate and negative impact on the value of the stock market. The federal reserve has been buying stocks and other financial instruments to boost their price as part of a world that has been shaken by COVID-19. Doing so increased demand for stocks, and this also increased the price of these stocks. With the announcement from the Federal Reserve that they would slow down their buying, stocks began to fall.

An interest rate hike also had a negative impact on stocks. Interest rates increase the cost of borrowing from banks. This is because of the impact that this has on borrowing money. Higher interest rates mean higher expenses across the board, and so businesses will have less money available – including less money to spend on non-financial costs.

The purpose of an interest rate increase is to slow the impact of inflation, but this can also have the impact of glowing economic growth, thus hurting the economy.

Interest rate hikes alone are typically associated with decreasing value in the stock market. However, rarely has an interest rate hike been solely responsible for a stock market crash. Crashes are usually a result of a variety of factors or overriding world events. It is certainly possible that interest rate hikes will negatively impact the stock market.

However, an outright crash as a result of interest rate hikes is unlikely, particularly given that the fed has announced its intention to raise interest rates. This early warning gives investors the chance to prepare for such an increase and adjust their behavior accordingly. 

What Is an Official Stock Market Correction?

A stock market correction is a term used to describe a decrease in value that is between 10-20%.

This is why you will sometimes hear commentators refer to the stock market as being “in correction territory” from a set period of time. Stock prices, of course, fluctuate constantly. This, a stock or stock market can be in a correction for a set period of time, only for that stock’s value to shift enough so that it is out of correction. 

Compared to a year ago, the Dow Jones Industrial Average is up 14.94%. The S&P 500 is up 17.44% in that same time. Both of these are obviously moving in a positive direction, and thus not in correction territory in that time span.

However, from the start of 2022 – as of the time of writing – growth stocks tumbled by as much 50%+. That begs the question if the high-flying stocks in the S&P 500 were in crash territory, how has the S&P 500 performed this year?

How Much Is The S&P 500 Down in 2022?

Year to date, the S&P 500 is down 7.6%.

There is no question that the announcement by the federal reserve that they would end stimulus and look to raise interest rates is part of the reason that the S&P is down. At its lowest point, the S&P was down more than 10% for the year, bringing it into correction territory.

However, the free-fall fell and abruptly turned around, bringing the S&P to roughly where it is today. While many investors remain fearful of the interest rates, the slowing pandemic numbers are bringing hope to many that the stock market may return to steady growth and gains. 

Is The Stock Market In Bear Market Territory?

“Bear Market Territory”  is the term used to describe a stock market that is down 20% for a two-month period.

This is obviously a very serious measure of stock market problems. However, thankfully, the S&P 500 is not anywhere near a bear market

Will The Stock Market Crash in 2022?

Unfortunately, there is simply no way of answering this question definitively. There are indications and risks that it could, with increasing interest rates being a key factor that could lead to a stock market crash in 2022.

Of course, these are not the only threats, and the stock market faces a series of risks and threats over the next few months. These include:

• War between Ukraine and Russia: Such a war could have major disruptions and lead to severe economic sanctions against Russia. It also comes with no shortage of military risks to the world as a whole, and war could disrupt commerce, shipping, oil production, and more.
• A resurgent COVID-19 pandemic, or the evolution of a new variant that was more contagious or deadly than Omicron. Some of the problems that the stock market faced at the end of 2021 were attributed to Omicron and the possibility of another variant is one that represents a real threat to the stock market.
• Continued inflation. Inflation could eat up more and more savings and force individuals to alter their purchasing patterns, thus having a significantly detrimental impact on the stock market – and the economy – as a whole.

Predicting a crash is impossible, and there is no way to definitively say if there will be a stock market crash in 2022. However, there are threats identifiable that could lead to a crash. The best thing that any investor can do is pay close attention to the market. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.