Will the stock market crash in 2022?

Sharemarkets around the world continue to wobble amid the uncertainty over Russia’s continued bombardment of Ukraine. It’s got many people wondering if we could be in for a stock market crash in 2022.

The initial response to the invasion in late February for many investors was to hold their nerve and not panic if they saw a fall in the value of their shareholdings.

The All Ords index (ASX: XAO), which tracks the 500 largest companies listed on the Australian Securities Exchange (ASX) according to their market capitalisation, fell 2.95% the day the fighting started on 24 February.

The index started to recover for a few days before falling again, though at the time of writing it’s still above its lowest point this year so far, which came in late January.

Dr Shane Oliver, Head of Investment Strategy and Chief Economist at AMP, has said that history showed sharemarkets tend to recover from any sudden drop following a crisis.

“The pattern is pretty much the same for most events, with an initial sharp fall in the share market followed by a rebound,” he said earlier this year.

Read more: Russia-Ukraine war hits Australian shares: What should investors do?

Sharemarkets rise, fall, crash and rebound

Sharemarkets rise and fall all the time, and occasionally they crash. But Ryan Felsman, Senior Economist at Commsec, told Canstar that January’s low point on the ASX was seen more as a market correction than a crash. The same was said of similar market falls in the US in January.

There are many reasons why markets may crash. In recent memory, crashes have been caused by the outbreak of the coronavirus pandemic in 2020 and the problems in the US home loan lending market which led to the global financial crisis in 2008.

An analysis of what may have caused a crash is always easy after the event. Predicting a crash beforehand is more difficult.

Dr John Christie, a Lecturer in Finance at the University of South Australia, has studied the Australian sharemarket movements over several decades, including market crashes.

He told Canstar the national account figures released by the Australian Bureau of Statistics (ABS) showed economic growth for the December 2021 quarter was at 3.4%, the equal highest quarterly growth since 1976. The nation’s economic growth for the 2021 calendar year was a surprisingly good 4.2%.

“Therefore, the Australian sharemarket would not be expected to crash in the short term,” he said.

“The United States share market in New York has been through a correction this year, but would not be expected to crash in the short term.”

Read more: 4 stock market crashes and what caused them

Impact of inflation and interest rates on share markets

One key thing to watch was what happens to oil prices during the Russia-Ukraine conflict as this could have an impact on inflation, said Dr Christie.

Before the conflict, Russia was the world’s second-largest oil exporter, so there are widespread fears the war could lead to consumers having to pay significantly more for oil-related products such as petrol.

It’s a point also raised by Dr Angel Zhong, a Senior Lecturer in Finance at RMIT University.

“Inflation is a key factor,” she told Canstar.

“Rising costs of supply, wages and freight as well as supply chain shortages affect all companies. This is likely to negatively affect the profit margin of companies.”

This in turn could have an impact on share prices but Dr Zhong said investors would already be factoring in such considerations, along with the potential for interest rate rises that could reduce a company’s profit margin.

“If interest rates increase, that means companies face higher borrowing costs, and investors tend to switch from equities to fixed-income products,” she said.

“This factor causes negative price movement in the ASX.”

But as to the threat of any stock market crash in Australia, Dr Zhong said that was unlikely.

“I do not think that there will be a market crash, even with the heightened geopolitical risk,” she said.

“The current decline in prices is not a market crash; I would rather say this is a market correction.

“At the moment, market fear has reached a high level, with heightened geopolitical risks, rising interest rates, overvaluation of tech stocks and inflation.

“But the market is forward-looking. That means these factors have been priced into the current prices.

“As the war between Russia and Ukraine develops, uncertainty will be gradually resolved.”

CommSec’s Ryan Felsman said the Australian sharemarket could potentially benefit from a strong domestic economic outlook, as well as largely-solid company earnings and dividend payouts. He pointed to mining, energy and agribusiness companies as potential winners.

Dr Zhong also said mining companies had been doing well of late, and any rise in interest rates could be good for the banking sector.

“Rising interest rates affect sectors differently,” she said.

“While for most sectors that means higher borrowing costs, the banking sector – a dominant segment of the ASX – will benefit from interest rate hikes.”

As with all investments, you may be wise to seek some professional independent financial advice before making any decisions on shares in your portfolio.

FAQ on sharemarket crashes

What triggers a sharemarket crash?

There are many reasons why sharemarkets may crash, including reactions to an outbreak of war, an assassination, a terrorist attack, a financial crisis or a pandemic. An analysis of what may have caused a crash is always easy after the event. Predicting a crash beforehand is more difficult.

Do sharemarkets recover from a crash?

Sharemarkets can recover from a crash, though it may take some time. It took 12 years for the All Ords to pass its previous high point set before the Global Financial Crisis hit share prices in 2008. Bear in mind that not all share prices will necessarily recover.

What should I do with my shares if the market crashes?

Generally speaking, it’s best not to panic if you see the value of your shares falling in a sharemarket crash. You should have a plan prepared for what to do when the value of your shares falls below a certain level.

Remember, you only make a loss if you sell any shares for less than the price you paid for them. You would be wise to seek some independent financial advice before doing anything.

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