Stock market crash: 4 early warning signs from 2022

After outstanding returns in 2020-21, will there be a stock market crash in 2022? I can’t say for sure, but I’ll be watching these four indicators closely!

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Three weeks into the new year and it’s time to revisit one of my most popular topics. Will there be a stock market crash in 2022? And what might be the early warning signs of a potential collapse? While reading up on financial markets for hours every day, I hunt for red flags and alarm bells linked to market meltdowns. Here are four distress signals I’ll be monitoring in 2022.

1. The January effect

An old City of London expression reads, “As goes January, so goes the year”. This claims that a stock market’s yearly performance can be forecast by that year’s first month. Interestingly, historical data suggest this correlation holds true, but only to a certain degree. After all, January does contribute a twelfth (8.3%) to a year’s overall result, which partly explains this association. So far in 2022, the US S&P 500 index has fallen about 2.2%. That’s a relatively small movement, but a negative one nevertheless. However, let’s see how 2022 as a whole turns out. For me, this signal is too weak to worry about a stock market crash just yet.

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2. Slowing Chinese growth

Growth in the Chinese economy — long regarded as the world’s economic engine — is slowing down. In the fourth quarter of 2021, China’s gross domestic product (GDP; national output) growth slowed to 4% year on year. That’s the slowest pace of expansion in 18 months, taking the country’s overall GDP growth to 8.1% for 2021. Also, year-on-year growth slowed in every quarter last year. China accounted for a quarter of global GDP growth in 2021. Thus, any loss of momentum in the Chinese economy is a global problem. Also, the troubles of hugely indebted developer China Evergrande have cast a long shadow over China’s property market. Again, a Chinese real estate crisis may have consequences for the wider world — possibly even triggering a stock market crash.

3. US inflation running hot = stock market crash?

Currently, my biggest fear is soaring US inflation (rising consumer prices). In December 2021, the US Consumer Price Index (CPI) rose at a yearly rate of 7%. That beats November’s figure of 6.8% and is the highest US CPI level since June 1982. To curb inflation running at a 40-year high, the Federal Reserve will do two things. First, it will tighten monetary policy by winding down its monthly bond purchases from $120bn to zero. This is set to happen by the end of March. Next, the US central bank will gradually start lifting interest rates. Analysts have pencilled in three to four quarter-point rises in 2022. While 2020-21 was a period of massive liquidity injections by central banks, global liquidity is set to slide in 2022-23. Whether inflation chokes off the US economic recovery and triggers a stock market crash is anyone’s guess, but this happened in the early 1980s.

4. Tech stocks and Bitcoin come off the boil

Highly valued US tech stocks have been in decline recently. The tech-heavy Nasdaq index peaked at an all-time high of 16,212.23 points on 22 November 2021. As I write, it stands at 14,893.75, down 8.1% from its peak and losing 5.9% in 2022. Likewise, leading cryptocurrency Bitcoin has lost 7.5% since December and has crashed 38.1% from its November peak. However, I don’t see plunging cryptocurrencies triggering a stock market crash. For me, the reverse is far more likely.

Finally, I’m not as afraid of stock market crashes as I once was. Thus, for now, I’ll keep buying cheap UK stocks for their dividends!

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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.

Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

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.

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