Watch these risk factors that could trigger market losses.
The S&P 500 is already down about 18% from its all-time highs in early 2022. But while the first half of the year has been a bumpy ride for investors, the 2022 S&P 500 pullback is still a far cry from the blue chip index’s 34% crash in February and March 2020 or its nearly 50% crash during the financial crisis in 2008 and 2009. Periodic pullbacks and cyclical downturns are a perfectly normal part of a healthy market. Still, the 2022 market weakness up to this point has investors concerned that the next big move for the stock market could take stock prices even lower. Here are seven catalysts that could trigger an even deeper S&P 500 sell-off in 2022.
Inflation has been enemy No. 1 for investors, shoppers and the Federal Reserve in 2022. The most recent monthly consumer price index revealed 9.1% inflation compared with a year ago, the largest year-over-year increase since 1981. Fed Chair Jerome Powell recently told Congress that the Fed is “strongly committed” to getting inflation under control, a commitment it demonstrated in June by implementing its first 75-basis-point interest rate hike since 1994. If inflation continues to rise or if the Federal Reserve is forced to continue to aggressively raise interest rates to keep it in check, it could be very bad news for stock prices.
The higher interest rates rise, the more expensive it is for companies to borrow money to invest in growth. Inflation has already forced the Federal Reserve to raise its target fed funds rate to a range of 1.5% to 1.75%, but the latest batch of inflation data suggests the Fed still has work to do to get inflation trending back in the right direction. Economists anticipate more rate hikes through the end of the year, even after the large increases in June and July.
S&P 500 companies reported 47.4% earnings growth for calendar year 2021, according to FactSet, but analysts were expecting a slowdown in growth in 2022 even before the macroeconomic environment deteriorated in the first half of the year. S&P 500 earnings growth slowed to just 4.4% in the first quarter of 2022, and index constituents are reporting 4.2% earnings growth so far in the second quarter. Investors are anticipating more aggressive Federal Reserve interest rate hikes in July and beyond. If earnings growth falls short of market expectations, the stock market’s reaction could be severe.
The biggest geopolitical event of 2022 has been Russia’s invasion of Ukraine, which has rattled global financial markets and remains a massive wild card for investors. In a worst-case scenario, what some have called a proxy war between the U.S. and Russia could devolve into a global nuclear war. But even a full Russian victory in Ukraine or annexation of Ukrainian territory could be enough to trigger a stock market sell-off. In addition to the Ukraine conflict, escalating tensions between China and Taiwan could put U.S. supply chains in significant risk. The U.S. midterm elections in November are also a major potential geopolitical market catalyst.
The value of the global cryptocurrency market has already dropped from a peak of more than $2.9 trillion in November 2021 to less than $1 trillion in July 2022, in what analysts are calling “crypto winter.” Investors are dumping risk assets as interest rates rise, and cryptocurrency holdings are at the top of the list. Many inexperienced investors that began trading during the COVID-19 pandemic hold cryptocurrencies in the same trading app portfolios where they hold stocks. Inexperienced traders often sell relative winners in their portfolios and double down on losers, so a deeper plunge for crypto prices could lead retail traders to cash out of stocks and buy crypto, further pressuring stock prices.
There have been several oil shocks in recent decades that negatively affected the stock market to varying degrees. The Saudi oil embargo in 1973 created temporary U.S. shortages. Iran’s Islamic Revolution in 1979 and the first Gulf War in 1990-1991 each caused oil prices to double. Oil prices as high as $140 per barrel even contributed to the economic crisis in 2008. Oil shocks have been one of the most common catalysts for U.S. economic recessions over the past 50 years. The price of crude oil is up roughly 44% in the past year and is trading at its highest level since 2014.
Supply chain disruptions
One of the biggest drivers of inflation in 2022 has been the disruption of global supply chains, particularly in China, Russia and Ukraine. In China, the government’s strict zero-COVID-19 policy has included periodic lockdowns of regions and major cities, disrupting U.S. suppliers and leading to chip shortages and other supply issues. Russia and Ukraine are major global suppliers of oil and gas, as well as wheat and other agricultural products, including fertilizers. The basic law of supply and demand suggests supply disruptions lead to higher prices and inflation. Many U.S. companies are at the mercy of their international suppliers, creating significant risk in the market.
7 risk factors of a stock market crash:
— Interest rates
— Disappointing earnings
— Geopolitical event
— Cryptocurrency crash
— Oil shock
— Supply chain disruptions
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Will the Stock Market Crash in 2022? 7 Risk Factors originally appeared on usnews.com
Update 07/26/22: This story was published at an earlier date and has been updated with new information.