The stock markets are in a great place right now. The FTSE 100 index is up by 15% over the year. And the best it seems, is yet to come. The pandemic is receding fast, and the economy is back to usual, to a large extent. The recovery is progressing and the forecasts remain optimistic. Companies have reported impressive results recently and some have even upgraded their outlooks.
I am bullish in my outlook as well. In fact, in a recent article I said that the FTSE 100 index could touch 7,500 before year-end. And from there, who knows how much higher it can go in 2022! But it is also prudent, in my view, to consider the other side. As 2020 has taught us well, sometimes the best laid plans can truly go awry. So here I consider if there are any signs that indicate whether the stock markets could crash in 2022.
High inflation is worrisome
As it turns out, there are. My big worry is about inflation. When inflation first started inching up a few months ago, it was widely considered to be a transitory phenomenon. However, concerns about it have grown in recent months. In fact, according to the Office of Budget Responsibility, UK’s inflation is expected to average 4% in the next year. This is a whole two percentage points higher than the Bank of England’s comfort level.
FTSE 100 companies have raised concerns about inflation for a while now as well. And going by the forecasts, I expect we we could hear more on it. Rising prices could be bad for their performance, especially if they are unable to pass on costs. If it becomes alarmingly high, I suspect it could even trigger a stock market crash.
Slow recovery could derail market activity
Right now, of all times, inflation can be particularly damaging because we are still in the process of recovery. The UK economy is still not back to its pre-pandemic levels. And growth so far has been slow, even though we now have data for the post-lockdown quarter of July–September. This indicates that UK focused companies in particular are growing less fast than would be hoped. And if we add inflation into the mix, I think growth could be disappointing going forward. If this happened, it would quite likely be reflected in companies’ results as well, which could lead to a stock market crash.
I think another potential stumbling block for the stock markets is the Brexit impact. So far, the pandemic has obfuscated its effects. There is no deal on financial services, which is a thriving sector for the UK and particularly for London. How this will play out will be evident over time. There could also be continued supply chain related issues that could slow down the movement of goods, which would also be bad news for the stock markets.
Will the stock markets crash?
But this is just me painting a doomsday scenario. It is quite possible that all of these challenges remain manageable. In fact, I think there is a lot to look forward to in 2022. So yes, while there is a possibility that the stock markets could crash in 2022, it is also entirely possible that they will continue to soar.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.