3 reasons why we could see a stock market crash in 2022

Any of these factors could cause a stock market crash in 2022, says this Fool, who is preparing his portfolio for the year ahead.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Trader on video call from his home office

Image source: Getty Images

Heading into 2022, I am worried there could be a stock market crash over the next 12 months. There are growing pressures on the stock market and economy, and these could weigh on equity prices in the year ahead, potentially causing a significant market decline. 

I think three primary challenges could ignite a stock market crash at some point in 2022. 

Stock market crash risks 

The first is rising inflation. This is climbing around the world due to several factors. Commodity prices, particularly energy prices, have jumped over the past six months, and this is having a knock-on effect on the economy. At the same time, food prices have also jumped and, in many regions, wages are growing as well. 

Here in the UK, the Bank of England expects inflation to hit 6% in the next few months. This is just an average. Energy and food inflation could be significantly higher. 

Rising prices will make it harder for companies to maintain their profit margins. If costs increase significantly, profits will fall, ultimately leading to lower equity valuations. Falling profits could also cause an investor exodus and a stock market crash. 

Money printing 

The second factor that could contribute to a stock market crash in the year ahead is the winding down of quantitative easing by central banks.

Quantitative easing has helped support equity markets over the past 24 months. Confronted with near-zero interest rates on fixed-income securities, investors have had no choice but to buy stocks. As central banks increase interest rates, some investors may leave the equity market searching for income elsewhere. As these investors sell out, it could spark a stampede away from equities into other assets. 

High valuations are the third and final reason I believe a stock market crash could materialise in 2022. As equity prices have surged over the past two years, some growth stocks are trading at multiples last seen in the dot-com bubble. This trend could reverse in 2022 as the world starts to move on from the pandemic.

As the world re-opens, investors may start to question if these growth stocks can meet their lofty expectations. Once again, this shift in sentiment could lead to a broad sell-off as investors stampede out of the market. 

Investing for the next decade 

Of course, all of the above is just speculation. There is no guarantee a stock market crash will happen in 2022. And even if it does, I am not taking any action right now.

Here at The Motley Fool we are long-term investors. I am only interested in buying a stock if I am prepared to hold it for the next 10 years, no matter what might happen to it in the near term. 

This is the approach I will continue to use over the next 12-24 months, no matter what happens in the broader equity markets. I plan to keep focusing on high-quality stocks, which have the potential to expand, no matter what the future holds for the market and the economy. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Rupert Hargreaves 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.

More on Investing Articles

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

When will the Rolls-Royce share price recover?

The Rolls-Royce share price may be down, but cash flows are surging! Zaven Boyrazian explores how long it could be…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

1 dirt-cheap FTSE 100 stock I think could TRIPLE my money!

Demand for lithium is forecast to surge by 42 times, enabling this FTSE 100 stock to potentially supercharge its profits…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Should I invest in the FTSE 100 – or try to beat it?

Our writer has the option of investing in a FTSE 100 tracker fund. So why does he choose to buy…

Read more »

Young black woman walking in Central London for shopping
Investing Articles

£1,500 to invest in a Stocks and Shares ISA? Here’s how I’d do it

Our writer has been investing in his Stocks and Shares ISA. Here he details how he could put £1,500 in…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

2 top FTSE 100 shares I’d buy before the market rebounds!

Christopher Ruane identifies a pair of FTSE 100 shares that have both tumbled in the past year and that he…

Read more »

Business development to success and FTSE 100 250 350 growth concept.
Investing Articles

Here’s why the next bull market may have already begun

The UK stock market has taken the Bank of England's interest rate hike in its stride and green shoots suggest…

Read more »

Gold medal
Investing Articles

No contest! Here’s my stock of the week

An update from this company offered some relief from the economic gloom. It's this Fool's stock of the week.

Read more »

Cogs turning against each other
Investing Articles

Scottish Mortgage shares are back on the rise: is now the time to jump onboard?

Scottish Mortgage shares have risen over 25% in the past 30 days. This Fool takes a look at why and…

Read more »