• Sun. Sep 25th, 2022

Is another stock market crash on the way?

Middle-aged white man pulling an aggrieved face while looking at a screen

As 2021 unwound, I repeatedly warned of the dangers of a stock market crash in 2022. I predicted that US share prices would slump, spreads would widen, and liquidity would fall as markets became more fragile, sensitive, and volatile. And so it came to pass.

The first stock market crash of 2022

On 4 January 2022, the S&P 500 index hit an all-time high of 4,818.62 points. However, the index then underwent a full-blown stock market crash, plunging to a low of 3,636.87 on 17 June. This left the US blue-chip index 1,181.75 points — almost a quarter (-24.5%) — below its record high.

As a bear market is usually defined as a fall of 20%+ from a previous high, this meant that the US stock market had qualified for this status. However, the index has since pulled back from this brink. Currently, it stands at 4,181.43 points — up 15% from 2022’s low and down only 5.7% over 12 months.

The UK market has held up well

Meanwhile, on this side of the Atlantic, the UK stock market has been a relatively safe port in this global storm. The FTSE 100 index hit a 52-week high of 7,687.27 points on 10 February 2022. At its 2022 low, it fell to 6,787.98 on 7 March (down 11.7%), following Russia’s invasion of Ukraine on 24 February.

The FTSE 100 now stands at 7,501.02 points, down just 2.4% from its 52-week high and up 5.2% over one year. Thus, it’s clear that the London market is nowhere near bear-market territory (for now, at least).

Is another stock market crash likely?

I think there’s a fair danger that the US stock market could enter bear-market territory again in 2022/23. For this to happen, the S&P 500 would have to drop below 3,854.90. This is just 326.53 points — around 7.8% — below its current level. Given that market volatility could easily see 8%+ knocked off the index’s current value, I fully expect US stocks to enter another bear market at some point in the next six to 12 months.

However, I estimate the probability of a full-on UK stock market crash to be far smaller. For the Footsie to enter a bear market, it would have to drop below 6,149.82 points (down 18% from here). As things stand, I see this as fairly unlikely.

What might trigger another crash?

I worry about a number of factors that collectively might trigger another downturn in global stock markets. First, there’s the geopolitical risk that the Russia-Ukraine war spirals into a larger conflict, perhaps involving other European nations. This seems a terrifying prospect to me.

Second, inflation is running red-hot in developed nations. Rising consumer prices — driven by soaring prices of oil, gas, and energy — are placing huge strain on household budgets. Likewise, rising interest rates worldwide are raising the cost of servicing home mortgages and other borrowing.

Third, it’s clear that economic growth in the US, China, Europe, and the UK is slowing fast. Indeed, we might even see a prolonged recession in 2022/23. And it’s because sentiment has been so poor lately that I’ve been aggressively buying shares in quality companies. While other investors are fearful, I’ve been greedy, snapping up cheap shares paying market-beating cash dividends. Ten years from now, I expect today’s troubles to be distant memories — fingers crossed!

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.