TheStreet’s Real Money and Action Alerts PLUS teams to look at whether the stock market will crash in 2022 and what that might look like for investors.
Doug Kass, Hedge Fund Manager Who Writes the Daily Daily on Real Money Pro
Crashes, or greater than 20% declines in the market averages, are a rare occurrence.
As my pal, Blackstone’s Byron Wien, is fond of saying:
“Disasters have a way of not happening.”
However, the odds of a decline approaching 20% appears to be rising in probability over the near term based on the following:
Evidence of a slowing rate of domestic and economic growth has increased.
Revenue and profit comparisons are growing more difficult.
The prospects for sustained and elevated inflation have risen. (Most notably the price of energy products — crude oil has advanced to $92 a barrel).
Continued supply chain and logistical issues will likely exacerbate the trends toward sustained high levels of inflation and in inflationary expectations. As an example, recently (the very popular) Ford Motor’s (
) – F Get Ford Motor Company Report shares tumbled into a bear market after fourth-quarter 2021 revenue and profit failed to meet expectations with CEO Jim Farley warning of “persistent supply-chain disruptions” which limited the company’s ability to meet strong demand. Ford further announced its intention to shutter eight factories in the U.S., Canada and Mexico to deal with continued chip shortages. And so will the shortage of labor contribute to higher inflation — with hourly earnings rising +5.7% in the last 12 months.
Interest rates — both in the belly of the curve and on the long end — have surged noticeably. Many companies, like Starbucks (
) – SBUX Get Starbucks Corporation Report, are being forced to markedly reduce operating hours in their stores around the country. There is over $250 trillion of global debt — much of which is variable rate. We are in the second year of a bond bear market There have only been two times in history (1952-53 and 1968-59) that fixed-income prices dropped in a two-year period — 2022 will likely be the third time.
The U.S. national debt has moved above $30 trillion for the first time. The increase over the past two years has been $7 trillion! With interest rates now in a confirmed uptrend, our country’s annual debt service will be rising rapidly — serving as a governor to domestic economic growth. The size of the U.S. debt matters most when the rate of change of the domestic economy is slowing, which it is now.
There have been multiple confirmations that demand has pulled forward (Facebook (
) – FB Get Meta Platforms Inc. Class A Report, Zoom ( ) – ZM Get Zoom Video Communications, Inc. Class A Report, DocuSign ( ) – DOCU Get DocuSign, Inc. Report, Peloton ( ) – PTON Get Peloton Interactive, Inc. Class A Report, etc.) during the pandemic — making comparisons difficult in the year ahead. The sentiment swing over the past two years has been like nothing we have seen before, with a boom for social media stocks when the pandemic first hit (“stay-at-home” plays), followed by a conspicuous bust over the past 12 months. China, the engine of global economic growth, is slowing more rapidly as property prices collapse under the burden of excessive debt.
The geopolitical backdrop is turning more hostile — particularly as it relates to Russia and Ukraine.
The relationship between (upside) reward and (downside) risk has deteriorated. (Rising equity prices are the enemy of the rational buyer,)
Credit anticipates, equities confirm. Credit and stocks decoupled in third-quarter 2014 when the Fed issued policy normalization plans. Credit and equities also decoupled in fourth-quarter 2017 when the Fed’s balance sheet began normalization. With the Fed now talking normalization, credit and equity markets are once again decoupling — at a time of record corporate and government debt levels.
Finally, the perils of a changed market structure (dominance of ETFs and quant strategies) have been exposed. The dangerous change away from active to passive management have led to unprecedented market volatility — with intraday Index swings of 2% to 3% have grown more commonplace. This sort of backdrop will likely be with us for some time — it does not engender market confidence.
Will There Be a Market Crash in 2022?
With interest rates and prices/costs rising into a slowing economy, we believe investors face a number of dilemmas and that any strength in the U.S. stock market may be short-lived. To us, price-to-earnings multiples will continue to compress as the Federal Reserve grows more hawkish, “slugflation” (sluggish economic growth and sustained inflation), the strike of the Fed put is much lower than many believe and a new regime of heightened volatility is likely.
It is my view that the odds favor that the rally over the last two days of January and into the first week of February may have been a bear-market rally and the first shot across the market’s bow — providing a great trading opportunity but not likely the basis for a new bull-market leg.
We continue to expect a down year for equities. How deep is uncertain.
The stock market already crashed in 2022. Did you miss it? Maybe the headlines did not creep into media and we did not see a ‘markets in turmoil’ special on CNBC, but the market was in a slow-motion crash of sorts in January. Now, my definition of a ‘crash’ is very different than others. With the markets down some 10% or so in just the first few weeks of the year, the market had come crashing down.
I can recall back in April 2000 when the Nasdaq fell 26% in one week. That was a major crash (
dot.com bubble imploded) but was felt for several days, not just one. Markets would enter a bear phase just months following. We’ve had some remarkable crashes; they just don’t get the headlines like we had in 1987. I recall more recently February 2018 and December 2011, and more recently the market crashed in March 2020. These moves down were tremendous buying opportunities, if you were ready for them (we never are too prepared, but with dry powder we can be there).
Though the market was ’saved’ from a disastrous month during the last two trading days in January 2022, the results were nonetheless atrocious. Market crashes don’t necessarily have to happen in a day, week, or month. After the mid-month holiday, markets were down for four sessions in a row and gave up a staggering amount of ground. The Nasdaq to that point had lost nearly half its gains from 2021. We should expect to see more of this up and down, wild movement in 2022.
Why is this happening? Simply put, volatility is on the rise and when that happens, the range of price expands. Yes, that means up and down; hence, we can see strong moves to the upside coupled with spectacular moves downward. It’s the range expansion that makes people nervous and for good reason. So buckle up, sunshine, and look for more “crashes” to come in 2022. Don’t be surprised by them, take advantage of the moment and add to your positions.
If a stock market correction is a decline of more than 10%, and a bear market is a decline of greater than 20%, what’s a stock market crash? In my view, a crash is a decline of 20% or more over a short period, like one to five days.
According to the folks at LPL Research, the average intrayear decline in the S&P 500 in midterm election years is around 17%. This statistic, combined with the prospect of a less accommodative Federal Reserve and the elimination of quantitative easing, leads me to believe that while a crash may not be probable, a more extended correction or bear market is likely.
The bottom line is while I don’t see a reason for the S&P 500 to crash in 2022, I believe the odds favor lower prices. Likely toward the 20% bear market threshold.