For investors, 2022 has been quite a roller coaster. Worries about inflation, rising interest rates, and Russia invading Ukraine in February sparked another wave of volatility for the stock market.1,2
All this fear and uncertainty about what’s coming next has led to whispers about the potential of another stock market crash—the first since the start of the coronavirus pandemic back in 2020. It’s also driven some investors to the sidelines. According to The State of Personal Finance 2022 Annual Report, less than half of Americans (44%) were actively investing by the end of 2021.
So, will we see the stock market crash during the rest of 2022? Let’s take a look at some of the major factors (with a cool, level head) to better understand where the market is going.
What Is a Stock Market Crash?
A stock market crash is a sudden and big drop in the value of stocks that’s caused by investors selling their shares quickly. That drives down the value of stocks for other shareholders, who also start selling their shares to try to cut their losses. The end result is that people could lose a lot of the money they invested.
Market chaos, inflation, your future—work with a pro to navigate this stuff.
To help us visualize how well the stock market is (or isn’t) doing, we look at indexes like the Dow Jones Industrial Average (DJIA), the S&P 500 and the Nasdaq. If you look at a historical graph of one of these indexes, you can see why we use the term crash. It’s like watching a plane take a nose dive.
What Causes a Stock Market Crash?
A stock market crash is caused by two things: a dramatic drop in stock prices and panic. Here’s how it works: Stocks are small shares of a company, and investors who buy them make a profit when the value of their stock goes up. The value and the price of those stocks are based on how well investors believe the company will do. So, if they think the company they’re invested in is headed for hard times, they sell that stock in an attempt to get out before the value drops.
The reality is, panic has just as big of a role in a stock market crash as the actual economic issues that cause it.
Let’s walk through an example from the coronavirus pandemic that shows you just how powerful panic is. As news of the virus spread, grocery and convenience stores all across the world sold out of toilet paper in a matter of days. Was there a toilet paper shortage? Well, yes and no. There wasn’t a shortage before people started panicking. But when people lost their minds and started stocking up on toilet paper, their actions created a shortage!
The same kind of panic can trigger a stock market crash. Once investors see other investors selling off their stocks, they get pretty nervous. Then, stock values start to dip, and more investors sell their shares. Next thing you know, everyone is dumping their stocks, and the market is in a full-fledged crash. Look out below!
Our point here is this: The stock market’s value is 100% based on perception and prediction of the future. No wonder it feels like such a roller-coaster ride!
Previous Stock Market Crashes: Examples From History
Throughout history, the market has gone through a lot of extreme ups and downs. When we look back, we’re reminded that, yes, a market crash is a very difficult thing to go through, but it’s something we can and will overcome.
- The Great Depression, 1929: Over the course of a few days, the DJIA dropped nearly 25%.3 It took a little over a decade for the economy to get back to predepression levels. It was the industry from World War II that helped get things back up and running.
- The Stock Market Crash, 1987: The market lost 22.6% of its value in one day known as Black Monday.4 But within two years, it had recovered everything it had lost.5
- September 11, 2001: Terrorist attacks in our country caused a major hit on the market, but it corrected itself super quick. Just one month later, the stock market had returned to September 10 levels and kept going up throughout the end of 2001.6
- The Great Recession, 2008: The DJIA lost more than 50% of its value in a really short time.7 But after a couple of years, the market was stronger than ever before—we were basically in a bull market (a period of strong economic growth) from 2009 to just before the coronavirus crash.
- The Coronavirus Crash, 2020: In March of 2020, the COVID-19 pandemic triggered the most rapid global crash in financial history. Still, the stock market recovered ground pretty quick, and the year closed with record highs.8 In fact, economists are now saying the recession from the coronavirus crash was the shortest on record—only lasting two months!9
So, keep your head up. Chances are, you’ve already lived through at least two major crashes and recessions. It’s part of the rhythm of life!
Will the Stock Market Crash in 2022?
Some experts say we’re already in the middle of a slow stock market crash right now. Is that true? Let’s take a closer look at what’s going on.
As of May 16, all of the stock market’s benchmarks are trending downward. The S&P 500 is down more than 16% since the start of 2022, the Dow Jones suffered seven straight weeks of losses, and the NASDAQ is down 28% for the year.10 That’s the bad news (but hang with us, the good news is coming).
What’s driving the stock market’s latest tumble? There are many moving parts that go into any stock market crash. But in a nutshell, the Federal Reserve raised interest rates for the first time in years to try to stop the rapid rise of inflation sparked by supply chain shortages and the ongoing war in Ukraine.11
Translation? The economy is on fire, and the Fed is dumping buckets of ice water to cool things down . . . and now the stock market is reacting to that shock to the system.
If you’re checking your 401(k) balance every morning and watching the gloom-and-doom news segments on the economy every night, then yeah. . . you might be freaking out a little bit. But let’s turn off Fox News and CNN for a minute. Take a deep breath, step back, and look at the bigger picture.
Here’s the deal: Smart investors keep a long-term perspective. They don’t stress out over how their investments have performed in the past few weeks or what they’ll do in the next couple of months. Nope! They’re more concerned about what will happen five, 10 or even 20 years from now. And that helps them stay cool when everyone else is panicking like it’s Y2K all over again.
Savvy investors see that over the past 12 months (from May 2021 to May 2022), the S&P 500 is only down about 5%. And if you pull back even further, you’ll see that the stock market is still up 64%(!) from where it was five years ago! Sixty-four percent!
Here's the lesson: When it comes to investing, keeping a proper perspective is the key. The only folks who get hurt on a roller coaster are the ones who jump off before the ride is over—so don’t jump off!
What’s Going to Happen Next?
But what’s in store for the rest of 2022? Will the markets continue to tumble and lead to another recession? Or will the markets bounce back and recover?
Listen, no one can perfectly predict what the stock market is going to do. All we can do is look at the things that will influence the market and your investments throughout the rest of the year. Let’s dig into the specifics and where we are now.
Reasons to Feel Cautious About the Stock Market in 2022:
- High inflation – Between all those stimulus checks and supply chain issues, we’ve seen a dramatic increase in the price of, well, everything—especially in grocery stores and at the gas pump—which has led to investors being cautious and consumers spending less.
- Rising interest rates – In an effort to fight inflation, the Federal Reserve started raising interest rates in early 2022—and there could be more rate hikes on the way soon. While this could slow down inflation, it could also trigger another U.S. recession.12
- Tensions in Europe – Russia’s invasion of Ukraine sent shockwaves around the world and could cause investors heartburn over the next few months. But if history shows us anything, the stock market usually recovers and is higher a year after major geopolitical or historical events.13 So hang tight.
Reasons to Feel Optimistic About the Stock Market in 2022:
- COVID-19 fading – As the coronavirus crisis eased, putting the Delta and Omicron variants in the rearview mirror, we’ve already seen more optimism, movement and spending. There’s a lot of pent-up energy in our country, and people are ready to get out and about!
- Unemployment falling – In April 2022, the unemployment rate remained steady at 3.6%—that’s the lowest level since February 2020 right before the pandemic started to wreak havoc on the U.S. economy. That means more people are continuing to look for jobs and are finding them.14
- New industries growing – Specific industries—tech, e-commerce and biotech—gained tons of ground during the pandemic and will continue to grow and give investors reason to feel confident.15
We can run numbers and make predictions all day long, but at the end of the day, we have no idea what’s going to happen for the rest of 2022—no one does. So let’s be the kind of people who are prepared for anything the future has in store.
What to Do During a Stock Market Crash
If the market does crash again in 2022, remind yourself that you lived through another crash just a few years ago. In the middle of chaos, you’ve got to focus on what you can control: your attitude, your outlook and your actions. Of course, a crash is scary. Yes, you’ll have to make some changes. But with the right plan to move forward, you can and will continue to make progress. Here are five ways you can respond to a stock market crash:
1. Refuse to panic.
Like we said before, panic can make the crash just as bad as the actual economic issues we’re facing. Don’t fall for it. Dealing with the unknown creates uncertainty, and uncertainty left unchecked can become fear. Choose to stay clear and positive with your thoughts.
2. Cut back on everything.
You can’t control how Congress makes their budget, but you can control how you make your budget! If you lose your job in the middle of an economic downturn, that means it’s time to cut out all unnecessary spending of any type.
Cancel your gym membership and avoid going on an online shopping spree! Meal plan to save money. Use up the food that you have in your pantry and freezer before you even think about eating out at a restaurant.
Focus on funding the Four Walls before spending money on anything else:
3. Follow the proven plan.
Rain or shine, the Baby Steps don’t change. They’re the proven plan for managing your money, and they work! You need to understand which step you’re on and then work the plan.
If you’ve lost your income, focus on piling up as much cash as you can. You can pause paying extra toward debt right now. As much as that stinks, don’t worry—it’s not forever. When the tough time passes—and it will—then you can start back up and pay extra on your debt.
If your income is stable, keep right on working the Baby Steps like you were, and don’t pause your debt snowball. Stay on the plan!
4. If you’re investing, stay invested.
If you’re on Baby Step 4, keep investing 15% of your income (unless you need to pause for a while because you lost your income). Lots of people are tempted to cash out their 401(k) or mutual funds when the market takes a nose dive before they “lose any more money.” But if you pull out now, you’ll guarantee a loss. Stay plugged in and ride it out to give your investments more time to grow and recover. Don’t try to time the market. Focus on time in the market.
5. Meet with an investment professional.
When there are big shifts in the market, schedule a call with your investment professional. You need specific advice for your situation—your age, your funds, the types of retirement accounts you have, and which Baby Step you’re on. Ask your pro if you need to make any changes because of the crash. Don’t be afraid to share what’s on your mind. If you’re married, make sure your spouse is on the call! Make a plan for how you’ll move forward together.
And by the way, if you’ve been playing the investment game without a pro in your corner—don’t. Connect with an investment professional in your area.
Stay Calm During a Stock Market Crash
You’ve got to choose to be patient and think long term here. No matter what the rest of 2022 has in store, remind yourself of the things you know to be true. You care about your family, your dreams and your future—so make your investment decisions with those things in mind. You’ll do a much better job of that if you stay positive and focus on the factors that you can control.
This article provides general guidelines about investing topics. Your situation may be unique. If you have questions, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.