For investors, 2022 has been quite the roller coaster. Concerns about inflation, rising interest rates and Russia’s invasion of Ukraine in February sparked another wave of stock market volatility.1,2
all this fear and uncertainty about what is to come next has led to rumors about the possibility of another stock market crash, the first since the start of the coronavirus pandemic in 2020. it has also led some investors to stay on the sidelines. margin. According to the 2022 annual State of Personal Finance report, less than half of Americans (44%) were actively investing at the end of 2021.
so, will we see the stock market crash for the rest of 2022? Let’s take a look at some of the major factors (with a cool, level head) to better understand where the market is headed.
what is a stock market crash?
A stock market crash is a sudden and large drop in the value of stocks caused by investors selling their shares quickly. that reduces the value of the shares for other shareholders, who also start selling their shares to try to cut their losses. the end result is that people could lose a lot of the money they invested.
To help us visualize how well the stock market is doing (or not), we look at indices like the Dow Jones Industrial Average (DJIA), the S&P 500, and the Nasdaq. If you look at a historical chart of one of these indices, you can see why we use the term crash. it’s like watching a plane go into a tailspin.
what causes a stock market crash?
A stock market crash is caused by two things: a dramatic drop in stock prices and panic. Here’s how it works: Stocks are small shares of a company, and investors who buy them make a profit when the value of their shares rises. the value and price of those shares are based on how well investors think the company will do. therefore, if they believe the company they’ve invested in is headed for tough times, they sell those shares in an attempt to get out before the value drops.
The reality is that panic plays as big a role in a stock market crash as the actual economic problems that cause it.
Let’s look at an example from the coronavirus pandemic that shows how powerful panic is. As news of the virus spread, grocery and convenience stores around the world ran out of toilet paper in a matter of days. Was there a shortage of toilet paper? well yes and no. there was no shortage before people started to panic. But when people lost their minds and started stocking up on toilet paper, their actions created a shortage!
The same kind of panic can trigger a stock market crash. once investors see other investors selling their stocks, they get pretty nervous. then stock values begin to fall and more investors sell their shares. Next thing you know, everyone is dumping their stocks and the market is in full swing. watch out below!
Our point here is this: the value of the stock market is 100% based on perception and prediction of the future. no wonder it feels like a roller coaster ride!
previous stock market crashes: examples from history
Throughout history, the market has been through many extreme ups and downs. As we look back, we remember that, yes, a market downturn is a very difficult thing to go through, but it is something we can and will overcome.
- the great depression, 1929: over the course of a few days, the djia fell nearly 25%.3 the economy returns to previous levels to depression. it was the WWII industry that helped get things going again.
- the stock market crash, 1987: the market lost 22.6% of its value on a day known as Black Monday.4 but within two years it had recovered all what he had lost .5
- September 11, 2001: terrorist attacks in our country caused a huge blow to the market, but it was corrected super fast. only a month later, the stock market had returned to the levels of September 10 and continued to rise until the end of 2001.6
- the great recession of 2008: the djia lost more than 50% of its value in a very short time. 7 but after a couple of years, the market was stronger than ever: we were basically in a bull market (a period of strong economic growth) from 2009 to just before the coronavirus crash.
- the coronavirus crisis, 2020: in March 2020, the covid-19 pandemic triggered the fastest global crisis in financial history. still, the stock market rallied back fairly quickly, closing the year at record highs.8 In fact, economists now say the recession triggered by the coronavirus crash was the shortest on record, lasting only two months!9
then keep your head up. Chances are you’ve already lived through at least two major crises and recessions. It’s part of the rhythm of life!
will the stock market crash in 2022?
See also: Is Twilio Stock a Buy? | The Motley Fool
some pundits say we’re already in the midst of a slow stock market crash right now. That’s right? let’s take a closer look at what’s going on.
As of May 16, all stock market benchmarks are trending lower. the s&p 500 is down more than 16% since the start of 2022, the dow jones has suffered seven straight weeks of losses, and the nasdaq is down 28% for the year.10 that’s the bad news (but stay with us, the looming good news).
what’s driving the latest stock market crash? There are many moving parts that go into any stock market crash. But simply put, the Federal Reserve raised interest rates for the first time in years to try to stem the rapid rise in inflation caused by supply chain shortages and the ongoing war in Ukraine.11
translation? the economy is on fire, and the fed is throwing buckets of ice water to cool things down. . . And now the stock market is reacting to that blow to the system.
If you’re checking your 401(k) balance every morning and watching the gloomy news segments about the economy every night, then yes. . . you may be scaring yourself a little. but let’s turn off fox news and cnn for a minute. take a deep breath, step back and look at the big picture.
Here’s the deal: Smart investors keep a long-term perspective. they don’t worry about how their investments have performed in the past few weeks or what they will do in the coming months. No! they are more concerned with what will happen five, 10, or even 20 years from now. And that helps keep them calm when everyone else is panicking like it’s the year 2000 all over again.
Savvy investors see that over the last 12 months (from May 2021 to May 2022), the S&P 500 is only down 5%. And if you go back even further, you’ll see that the stock market is still up 64% (!) from five years ago. sixty four percent!
here’s the lesson: when it comes to investing, the key is to maintain proper perspective. The only people who get hurt on a roller coaster are the ones who jump off before the ride is over, so don’t jump!
what will happen next?
But what awaits us for the rest of 2022? Will the markets continue to fall and cause another recession? Or will markets bounce back and bounce back?
Listen, no one can perfectly predict what the stock market is going to do. all we can do is look at the things that will influence the market and your investments for the rest of the year. let’s dive into the details and where we are now.
reasons to feel cautious about the stock market in 2022:
- High Inflation: Between all those stimulus checks and supply chain issues, we’ve seen a dramatic increase in the price of, well, everything, especially in grocery stores. groceries and at gas stations. bomb, prompting investors to be cautious and consumers to spend less.
- Increasing Interest Rates: In an effort to combat inflation, the Federal Reserve began raising interest rates in early 2022, and more hikes could be coming soon of rates. While this could slow down inflation, it could also trigger another us. recession.12
- tensions in europe: the invasion of ukraine by russia shocked the whole world and could cause investors heartburn in the coming months. but if history tells us anything, the stock market typically recovers and is higher a year after major geopolitical or historical events.13 so wait.
reasons to feel optimistic about the stock market in 2022:
- covid-19 fades: As the coronavirus crisis eased, putting delta and omicron variants in the rearview mirror, we’ve already seen more optimism, movement and spending . there is a lot of pent up energy in our country, and people are ready to come out!
- unemployment falls: in April 2022, the unemployment rate remained stable at 3.6%; That’s the lowest level since February 2020, just before the pandemic started wreaking havoc in the US. uu. economy. that means more people continue to look for jobs and are finding them.14
- new growing industries – specific industries (tech, e-commerce, and biotech) gained a lot of ground during the pandemic and it will continue to grow and give investors reason to feel confident.15
We can run numbers and make predictions all day long, but at the end of the day, we have no idea what’s going to happen for the rest of 2022, no one knows. so let’s be the kind of people who are prepared for whatever the future holds.
what to do during a stock market crash
If the market crashes again in 2022, remember that you experienced another crash just a few years ago. In the midst of chaos, you must focus on what you can control: your attitude, your perspective, and your actions. Of course, a crash is scary. yes, you will have to make some changes. But with the right plan for moving forward, you can and will continue to make progress. Here are five ways you can respond to a stock market crash:
1. refuse to panic.
as we said before, panic can make the crisis as serious as the real economic problems we face. don’t fall for it. dealing with the unknown creates uncertainty, and uncertainty left unchecked can turn into fear. choose to stay clear and positive with your thoughts.
2. reduce everything.
You can’t control how Congress makes its budget, but you can control how it makes its budget! If you lose your job in the middle of an economic downturn, that means it’s time to cut out all unnecessary spending of any kind.
cancel your gym membership and avoid online shopping! meal plan to save money use the food you have in your pantry and freezer before you even think about eating out at a restaurant.
focus on funding the four walls before spending money on anything else:
3. follow the proven plan.
rain or shine, baby steps don’t change. they are the proven plan for managing her money, and they work! you need to understand what step you are in and then work on the plan.
If you’ve lost your income, focus on accumulating as much cash as you can. you can pause further payment of debt right now. As much as it sucks, don’t worry, it’s not forever. when the hard times are over, and they will be, you’ll be able to start over and pay off more of your debt.
If your income is stable, keep working the small steps like you were and don’t stop your debt snowball. follow the plan!
4. if you are investing, keep investing.
if you’re in step 4, keep investing 15% of your income (unless you need to take a break for a while because you lost your income). many people are tempted to withdraw their 401(k) or mutual funds when the market takes a nosedive before they “lose more money.” but if you withdraw now, you will guarantee a loss. stay connected and take advantage to give your investments more time to grow and recover. don’t try to time the market. focus on time to market.
5. meet with an investment professional.
When there are big changes in the market, schedule a call with your investment professional. you need advice specific to your situation: your age, your funds, the types of retirement accounts you have, and what baby step you’re in. ask your professional if you need to make any changes due to the lockout. don’t be afraid to share what’s on your mind. if you’re married, make sure your spouse is on the call! make a plan for how you will move forward together.
And by the way, if you’ve been playing the investment game without a pro on your side, don’t. connect with an investment professional in your area.
stay calm during a stock market crash
You have to choose to be patient and think long term here. no matter what the rest of 2022 throws at you, remind yourself of the things you know to be true. You care about your family, your dreams, and your future, so make your investment decisions with those things in mind. You’ll do much better if you stay positive and focus on the factors you can control.