The stock market is seen by many investors as a money machine but one reality that they fail to embrace is that crashes and corrections are a normal part of the investment circle of the stock market. In the course of this article, we will be looking at five reasons why the stock market will crash in soon, and what to do.
1. An Increase in Margin Debt
The major reason why the stock market might crash in 2022 is due to a rapid increase in margin debt. When we talk about margin debt, we mean money that was borrowed from institutions/brokerages with interest to short sell securities or buy them.
Over time it is uncommon to see that the normal amount of marginal debt should increase. For instance, as of November 2021, there were nearly 919 billion dollars in the margin in debt as an outstanding. Moreover, America has only witnessed three instances of this since the beginning of 1995 where the debt rose by at least 60% in a single year. The other two times were just months before the dot.com bubble burst, immediately before the financial crisis, and then in 2021. An increase in margin debt is one sure-fire way the stock market can crash.
2. The Crashing Of The Crypto Market
As stated earlier, the stock market has been a money machine in the United States of America. But over the years, investors have piled into the cryptocurrency market. This has resulted in bitcoin gaining as much as 8,000,000,000% in a little over 11 years.
It is important to note that the cryptocurrency market has not been able to decouple from the stock market and define its own identity. What is interesting is that a good number of investors are also putting their money to work in stocks. If there is a cryptocurrency crash, it will definitely affect stocks that are dependent on them. It will also reduce investment capital for equities.
3. The Spread Of News Covid-19 Variants
Another reason why the stock market might crash is because of the coronavirus. Since World Health agencies have been able to contain the virus, there have been a new cause for concerns. And that is largely due to the fact that there are new variants of the coronavirus. The Coronavirus affects the stock market by bringing about supply chain issues and workflow disruptions. It can lead to international travel restrictions and an increase in the number of lockdown days.
4. A crackdown in China’s Tech Stocks
China has been inhibiting the growth of Wall Street. China, a nation that has the second-largest economy in the world by gross domestic product, entered a trade war with the United States of America. One of the things that can cause the stock market to crash is a crackdown in the nation’s biggest tech stocks.
5. Historically High Inflation
In an economy that is growing perfectly, there are moderate levels of inflation. Every growing business in America deserves moderate pricing power.
The price of goods and services in America increases rapidly, businesses won’t be able to buy enough with their disposable income.
Some result in inflation which can slow growth and then encourage the Central Bank which is the Federal Reserve to tighten its monetary policy.
Three Things To Do Before or After The stock market crashes
For your business there is some level of impact the stock market crash can have on your investments.
Here are three things that we have listed for you to do if the stock market should crash in 2022.
i. Invest Only As Much As you Can After Saving Enough For The Next Three Years
The stock market crash is not good news for short-term investors and will always be disturbing. The reason for this is that the money that is used in the stock market is actually money that is taken as a loan or by submission of assets. That is why it is not recommended for any investor to invest money in the stock market without saving enough for the next three years. I said stock markets need to be intelligent to know how the stock market can be volatile.
If you invest in the stock market blindly you will wind up with heavy losses. That is why if you want to make an investment in the stock market you should ensure that you have enough money that will be left if losses are incurred.
ii. As An Investor Diversify Your Income Portfolio
Another clever approach is that a stock market investor should build assets outside the stock market. This will help to ensure that there is continuous cash flow even when the stock market crashes. When you diversify your income portfolio, it reduces the impact of the stock market crash on your business.
This is why you should start today to build a strong and more diversified income portfolio that is excluded from the United States stock market.
iii. If You Can, Buy More Stocks
Did you know that the best time to buy more stocks is when the market crashes? If you have saved enough from your business and have other assets that give you income, then the crashing of the stock market is the best time to acquire more stocks.
The reason for buying more stocks is very simple, when the stock market crashes it is an indicator that all the prices are down. However, there is no way they will stay down forever. The prices of the stocks will certainly go up at a point, and this will be a perfect opportunity to sell. As a seasoned stock market investor, you should already know that the rule of thumb of the stock market is “buy low sell high”.