These risk factors could precipitate a stock market crash.
Stocks in 2022 are off to a terrible start, with the S&P 500 down close to 20% since the start of the year as of May 23. Investors in Big Tech are growing more concerned about the economic growth outlook and are pulling back from risky parts of the market that are sensitive to inflation and rising interest rates. This is a recipe for a troubled macroeconomic environment. While stock market volatility is normal in the short term, market weakness so far in 2022 has investors worried about further downward movement. Here are seven risk factors that could trigger a market crash in 2022.
High inflation.
The U.S. economy is experiencing persistently high levels of inflation. Inflation, measured by the consumer price index, or CPI, is the rate of change in prices of goods and services over time, and prices have been continually rising, contributing to stock market volatility. The latest CPI reading in April increased 8.3% on an annual basis, near the highest level the American consumer has seen in more than four decades. If inflation persists, it can be a huge burden for consumers, especially if rising prices are not offset by rising wages. Meanwhile, higher prices for raw materials, inventory, transport and labor have affected corporate balance sheets. While company earnings in 2022 have largely grown, inflation troubles have hurt profit margins. High inflation erodes consumer confidence and can slow economic growth, depressing the shares of publicly traded companies.
Rising interest rates.
As inflation is a major economic concern, the Federal Reserve, seeking to maintain a target of 2% inflation over the long term, will likely continue to tighten monetary policy. This involves raising interest rates. While increasing interest rates is not aimed at beating down the stock market, this tactic puts pressure on equities. In a rising-interest-rate environment, companies tend to cut back on spending, the economy can slow down and the rate of corporate earnings growth may moderate as well. These factors inevitably impact stock prices.
Russia-Ukraine war.
Russia’s invasion of Ukraine has contributed to short-term stock market volatility in the U.S. and around the world. Many countries, particularly in Europe, have been reliant on Russian energy exports that have been disrupted by the war. Now, the European Union is moving toward an agreement on a Russian oil embargo. The U.S. issued a ban on imports of Russian oil, liquefied natural gas and coal in March and has since been working to ramp up domestic resources. Russia produces roughly 10% of the world’s oil, and even with increases in U.S. oil production, prices are likely to remain elevated in the short term. Inflated oil prices have been a burden for U.S. businesses because they drive up transportation and manufacturing costs. They can decrease company growth expectations and lower earnings forecasts, which hampers stock prices.
Supply chain issues.
Supply chain disruptions are another unfortunate reality resulting from the COVID-19 pandemic. Even though the U.S. economy has seemingly weathered the worst of the pandemic, it is still dealing with residual global supply chain challenges. For example, in Apple Inc.’s (ticker: AAPL) fiscal second-quarter earnings call April 28, CEO Tim Cook warned that supply chain disruptions exacerbated by China’s latest COVID-19 lockdowns could cut $4 billion to $8 billion from revenue in the current quarter. As demand for goods and services continues to grow, production will need to catch up; otherwise, companies’ ability to meet customer demand will be restricted, hurting profits.
Unsustainable labor costs.
Some good news is that the unemployment rate remained at 3.6% in April, the lowest rate since February 2020. Still, there are millions of jobs available. But the low unemployment rate means the labor market is more competitive, which has led some companies to either pay up for their workforce or scale back on labor. Microsoft Corp. (MSFT) has increased pay and stock compensation to keep its employees, nearly doubling its budget. But Robinhood Markets Inc. (HOOD) is cutting 9% of its full-time employees, Netflix Inc. (NFLX) has laid off 150 employees across the company, and Peloton Interactive Inc. (PTON) has laid off 2,800 workers. As companies are experiencing slower business and earnings growth, some have resorted to cutting labor costs to stay afloat.
Weak earnings.
Companies are facing headwinds from multiple angles. Price inflation is putting pressure on corporate earnings, and as the Federal Reserve takes a more hawkish approach to its monetary policy, this in turn puts added downward pressure on risky assets like stocks. While a majority of market sectors experienced growth in 2022’s first quarter, some companies are facing weaker profit margins. The consumer discretionary and financials sectors are reporting year-over-year declines in earnings, according to a May 20 FactSet analysis. Consumer discretionary has taken the biggest earnings hit of all 11 sectors, falling 33.2%. Financials reported the second-largest decline, with a drop of 19.8%. More than 60 companies in the S&P 500 index have issued negative second-quarter earnings-per-share guidance, FactSet reports.
China’s economic drag.
China’s zero-COVID-19 policy is having a harsh impact on the country’s economic outlook. But China’s renewed pandemic crisis is also challenging global supply chains, which results in higher prices and shortages of some goods with broader reach. Since China has the world’s second-largest economy, its troubles raise concerns about the well-being of the global economy. Global companies such as Apple, Tesla Inc. (TSLA) and Toyota Motor Corp. (TM), which have manufacturing operations in China, are seeing significant headwinds for production, sales and profits. Although economies are not the stock market and vice versa, when economies contract, business activity usually decreases and exposes the stock market to losses.
7 risk factors for a stock market crash in 2022:
— High inflation.
— Rising interest rates.
— Russia-Ukraine war.
— Supply chain issues.
— Unsustainable labor costs.
— Weak earnings.
— China’s economic drag.
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Will the Stock Market Crash in 2022? 7 Risk Factors originally appeared on usnews.com
Update 05/24/22: This story was published at an earlier date and has been updated with new information.
