Will the US Stock Market Crash in 2022?

Just this week The Financial Times reported that the US stock market endured the worst January since the global financial crisis of 2009. Don’t think it’s bad? It’s bad. However, that doesn't mean you can expect a total stock market crash in 2022.

The S&P 500 ended January 2022 down 5.3%, which is the biggest monthly drop since the beginning of the pandemic back in March 2020. Why so bad? Aren’t things supposed to be getting “better” as we slowly crawl our way out of season three of an economic downturn spurred by COVID?

Well, there are a lot of factors at play, namely rising inflation and interest rates that have caused a massive tech sell-off affecting the entire market. However, we don’t predict a full on crash by any means. If you’re new to investing, or even a seasoned investment pro, here’s how to ride this wave of volatility all the way to gains.

What Constitutes a Stock Market Crash?

While things have been pretty volatile lately, it doesn’t look like we’re headed towards a total stock market crash. But, how, as a beginner investor, will you know what a crash looks like when it comes?

NerdWallet does a great job at defining a stock market crash. While there’s no real “official” definition of what constitutes a market crash, “if the S&P 500 drops 7% in a single day, trading may be halted for 15 minutes.” As they point out, this has only happened a handful of times in the history of the stock market.

So, you can rest assured that we’re not heading towards a total 1930s-style crash. Typically, the S&P 500 fluctuates between -1% and 1% on any given day. On February 2nd, for example, the change was about .85%, for context. Anything outside of that 1% change is usually considered an active or particularly volatile day, but it doesn’t mean you need to sell off everything immediately in anticipation of a crash.

Why the Big Tech Sell-Off?

What’s the deal? Why is everybody selling their tech stock? There are a few reasons, and none of them seem to be worrying long-term for this sector of the market.

First of all, investors have been shifting money as interest rates are expected to rise. Investors fear higher inflation rates will lead to tighter monetary policy from The Fed which could shake up already fragile markets even more so than before. And, there's been an unexpected spike in bond yields that had everyone rushing towards safety.

To help you understand this further, check out what Jack Manley, JP Morgan Asset Management's Global Market Strategist, had to say about tech stocks right now: 

When you think about, perhaps, the trajectory of interest rates as we move through this year, you've got to look for companies that are able to generate realistic profitability. And for any tech company that just burns through cash without any sort of viable product, that's a tough sell this year.

Focus on Investing in Good Businesses

Our Founder & CEO, Andrew Glaze, is a former investment banker and hedge fund pro. His advice for when the stock market looks like it has the past few weeks? 

When it comes to investing, asset allocation is the key that opens up your portfolio for success, especially during times of high volatility. Adding diversification within different categories of investments takes them one step further and helps smooth out any tumultuous markets you may face along life's journey.

Aside from that though, we recommend that you look to invest in good businesses (ones that pass the test of Porter’s Five Forces). Invest in really great businesses that you’ve always wanted to own but never could because they were too expensive. 

Does this sound too risky for you? It’s really not. The really good businesses will bounce back faster, but also in times of continued distress, the really good businesses are likely to go down less than the others, making them a great long-term investment. Their declines should be the smallest moving forward from here on out, at least through 2022. And, the upside is that you own a business you always wanted to own at a really good price.

Be Wary of Bitcoin

Bitcoin is down 50%. And that’s just one of the reasons why you should still be wary of it. If you are going to invest in Bitcoin, it should only be 3% of a diversified portfolio. With this low percentage, a dip like 50% isn’t going to be a big deal. Sure, it might seem like a buying opportunity right now. And, it could be. However, if you’d invested 70% of your portfolio in Bitcoin before this dip, you’d be feeling pretty horrible right about now.

Overall, percentages and waitings matter. People who know how to set their percentages and portfolios right are the real winners over time. Position sizing is where you create real value as a great, long-term investor. You can learn more about position sizing here.

Prepare for More Volatility

If our Founder & CEO could sum up his advice for beginner investors right now worried that investing just isn’t for them due to the drastic dip we’ve seen recently? Don’t worry, but expect more volatility.

Ultimately, we recommend that you:

  • Sell losers straight away. They won’t serve you.
  • Realize your losses and walk away when it’s time to walk away.
  • Let go of dreams of the investment you thought you wanted.
  • Focus on buying high-quality businesses.
  • Remember that the market moves…randomly and abnormally. You can’t ever focus on short-term trading. Selling what’s low-quality is a good idea right now. Take that cash and move onto high-quality businesses.

What’s a high-quality business? Zoom and Square are potential stocks to look at right now. Zoom is down about 75% and Square is down about 70%. They’re not at their bottom price yet (we predict), but two years from now the stock is likely going to be much higher than what it is today. Their business models are strong, and that makes them great long-term investments.

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