Is A Market Crash Inevitable?

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We don’t like to start your week off on a downer, but today we’re asking, is the next market crash on the horizon? Read on to find out. Stick around a little longer and we’ll also give you the lowdown on this week’s key fundamental events. Let’s go!

Stock Crash History Fact: The strength of America’s economy in the 1920’s came to a sudden end in October 1929 — even if the signs of problems had existed before the Wall Street Crash. Suddenly the ‘glamour’ of the Jazz Age and gangsters disappeared and America was faced with a major crisis.

What goes up…

Since the COVID-influenced bottom in March 2020, stock market investors have been treated to a period of steady gains. It’s actually picking up pace, with the S&P 500 gaining 27% throughout 2021, well over double its average annual total return of 11%, a figure stretching back to 1980.

Is it inevitable that this period of sustained growth will result in a crash?

What Could Cause The Next Crash?

History tells us that the market is a cyclical beast. Volatility, crashes, and corrections are a normal part of investing. Let’s check where the next crash might come from.

#1 Scariants

The social media coined term for fearmongering over new variants is “scariants”. Whilst the Omicron variant was discovered to be largely non deadly, media induced fear still caused closures, lockdowns and economic damage.

Restrictions are being removed and some parts of the world are returning to normality. However, the threat of new COVID-19 strains or scariants, means a widespread return to normal could be sabotaged. Supply chain issues and workflow disruptions could remain throughout 2022 and that leads to unpredictability. Unpredictability can quite easily lead to a market crash.

#2 Shaky Midterm elections

The US public will engage in Midterm elections on 8 November. With the Democrats only holding a very narrow majority in the House and Senate, even a slight swing toward the Republicans could cause problems for Joe Biden achieving his agenda. It would also likely take any increase to corporate tax off the table.

On the other side of the coin, a Democrat victory would solidify their control of the houses and make it almost certain that Biden’s Build Back Better pledge will come into law.

History tells us that the president’s party almost always loses the Midterms, but either of these swings will have a major impact on the direction of governance over the next 2 years with winners and losers on both sides.

#3 A crypto wipeout

Over the last few years, investors have poured cash into the crypto market. Bitcoin has risen 8,000,000,000% in 11 years. Think of that!

A fair percentage of crypto investors also put some of their money to work in stocks and a crypto crash would likely weigh on stocks dependent on the cryptocurrency ecosystem.

Crypto doesn’t tend to hold up well when the stock market undergoes a correction. During Q4 2018, the S&P 500 dropped 20%, while crypto’s market cap declined from around $222 billion to roughly $130 billion, marking a 41% drop. Something similar also happened to both markets in March 2020.

These markets are intrinsically linked and any correction in one will impact the other, increasing the chance of a major crash.

#4 Inevitability

What goes up always comes down. It’s inevitable. Gravity affects the markets in the same way.

It’s been 23 months since the bear market bottom and we’ve yet to see any double-digit percentage pullback in the S&P 500. This is largely unprecedented.

Since 1960, there have been 9 bear markets in the S&P 500. After these dips, the index has undergone at least one correction of at least 10% in the following 36 months. Rebounding from a bear market bottom is a bumpy process.

History shows that a hefty correction is coming, and could well happen in 2022.

What do you think?

Is a crash on the cards? Or is this all pessimistic, hot air, hullabaloo? Let us know what you think by tweeting us at @_contentworks.

Coming Up Week 21.02.22

Monday

No major events are scheduled.

Tuesday

● USD — Markit Manufacturing PMI Flash (FEB); CB Consumer Confidence (FEB)

Wednesday

● NZD — RBNZ Press Conference

● EUR -Core Inflation Rate YoY Final (JAN)

Thursday

● USD — GDP Growth Rate QoQ 2nd Est (Q4)

Friday

● USD — ​​Core PCE Price Index YoY (JAN); Durable Goods Orders MoM (JAN); PCE Price Index YoY (JAN); Michigan Consumer Sentiment Final (FEB)

Here at Contentworks we closely follow market movements and prep content that we think your traders would love to read. Let’s get you started right here.

Speak soon!

The Contentworks team