3 reasons why a stock market crash is coming

| January 7, 2022

There is a rising level of fear from financial analysts that a stock market crash may be coming in 2022. The FTSE 100 had a stellar year in 2021, climbing by an impressive 14.2%, not including the extra income from dividends. But a lot is going on within the UK markets from a macro-economic perspective. And most are not good news.

Let’s take a look at what factors are most likely to trigger a market crash. And also, what I’m doing to protect my portfolio.

Inflation is on the rise

The news of rising inflation is hardly new at this stage. Issued stimulus cheques injected into the economy back in 2020 has led to a predictable rise in inflation. This effect has only been exacerbated by the disruptions in supply chains triggered by the pandemic. 

As it stands, inflation is at its highest point in a decade. And with the cost of raw materials going up, companies are likely to see their profit margins shrink unless they can pass on the cost to customers.

The Bank of England has since hiked up interest rates to help tackle the inflation situation. But for the companies that are riddled with debt after taking out loans to survive the pandemic, this isn’t welcome news. Why? Because it means their interest payments are about to get bigger, squeezing free cash flow.

Unsurprisingly, if a large number of companies start seeing their financial health dwindle, it could be enough to trigger a stock market crash.

Will the pandemic trigger another stock market crash?

Over the last year, some substantial progress has been made worldwide in vaccinating populations against Covid-19. Yet despite these efforts, infection rates are near all-time highs. 

This has already forced the UK government to reintroduce certain travel restrictions. And there is ongoing speculation of another round of lockdowns here in the UK. Considering the number of companies that barely survived the last lockdown period, this could be cataclysmic for some businesses if it does happen. The hospitality sector is especially at risk.

If the level of infections doesn’t start falling soon, these speculations may turn into reality. Needless to say, this could once again trigger a stock market crash, sending the FTSE 100 into a double-digit nose dive, as it did back in March 2020.

The economy is still weak

The third concerning factor is the lacklustre performance of the UK economy in recent months. Looking at the GDP statistics, the growth of the UK economy has failed to meet analysts forecasts, barely rising above 1%. To make matters worse, this stagnating growth seems to be slowing down.

A potential catalyst behind this is the removal of government support schemes for businesses heavily impacted by the pandemic. The housing market, in particular, has been a significant beneficiary of government support policies until recently. And with these now revoked, property developers in the FTSE 100 could start struggling. Given these make up a core part of the UK economy, the slowdown could trigger a stock market crash.

What I’d do if the stock market crashes

Despite these concerning factors about a crash, I remain optimistic about the stock market in 2022. But suppose prices do suddenly enter a free-fall. In that case, this could be a perfect opportunity for me to buy shares in high-quality businesses at a discount.

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Views expressed on the companies, assets and strategies mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.

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