The stock market crash is already happening. Or is it?

With US stocks having their worst January in history, is a stock market crash inevitable? Or is this just a wobble? And UK shares are doing rather well…

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.

As 2021 went on, I became increasingly concerned about the potential for a full-blown stock market crash. With global stocks soaring in 2019, 2020, and 2021, I was sceptical that this bull (rising) market could keep going in 2022. Like all winning streaks, it must eventually come to an end. Hence, in the final quarter of 2021 and repeatedly in December, I warned about the growing risks of another market meltdown.

A stock market crash has been a long time coming

It’s tough to be a rational investor in a world of irrational exuberance fuelled by near-zero interest rates. Younger investors largely choose to ignore my warnings about speculative investments. In my experience, they want to talk about only two things: cryptocurrencies (especially Bitcoin) and Tesla. Hardly anyone under 30 wants to discuss ‘boring’ investing: buying shares in quality businesses for the long term. And when high spirits, speculation, and excessive risk-taking drive prices, the risk of a stock market crash multiplies.

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Some bubbles have already burst

In financial jargon, a 10% decline from peak prices is deemed a ‘correction’. A ‘bear market’ — or stock market crash — begins when prices dive by 20% or more. And that just hasn’t happened in most major markets. For the record, the US S&P 500 index hit a record high of 4,818.62 points on 4 January. It now stands at 4,363.61 — losing 455.01 points and down nearly 9.5%. On Monday, the index entered correction territory, but has since gained ground. Meanwhile, the tech-heavy Nasdaq Composite index peaked at 16,212.23 points on 22 November. It now stands at 13,559.89, diving almost a sixth (-16.4%) in two months. Thus, the Nasdaq is in correction territory and closing in on a bear market.

That said, there has definitely been a stock market crash in what I call ‘spec tech’ — speculative technology stocks. Tesla has collapsed 34% from its all-time high and is now up a mere 1.6% over 12 months. Meanwhile, the price of Bitcoin has collapsed from its peak of nearly $69,000 in early November to $37,217.70 as I write. That’s a collapse of almost half (-46.1%). Ouch.

UK stocks are holding up well

Generally speaking, the riskier an asset, the more its price has fallen in 2022 (and since November for tech stocks). What’s more, even low-risk government bonds have lost significant value in January, on fears of multiple rate hikes by the US Federal Reserve. But here in the UK, there are no signs of a stock market crash. In fact, London shares have held up pretty well so far in January.

On Friday, the FTSE 100 index closed at 7,466.07 points. That’s just 152.94 points below its 52-week high of 7,619.01 — a modest decline of just 2%. In 2021, I repeatedly argued that UK stocks were too cheap in historical and global terms. Now, as high-priced assets dive, the UK stock market is holding up nicely. In London at least, the stock market crash is happening elsewhere.

To sum up, after a year of excessive risk-taking, January is set to be the worst start to a year for US stocks in history. Even so, I still view the US market as largely overvalued. And with lower liquidity and rising interest rates on the horizon, I’m braced for higher volatility in 2022. But I’m still going to keep investing, buying cheap UK shares on low ratings and high earnings yields — and paying juicy cash dividends!

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. 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.

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