Here’s why I’m bracing for a stock market crash in 2022
I think the chances of a stock market crash in 2022 are increasing.
I believe a few factors could contribute to a market decline over the next two months. The most pressing is inflation. Prices are rising around the world as the supply chain crisis forces companies to rethink their pricing strategies.
At the same time, commodity prices have surged over the past 12 months. It also drives up production costs for many companies, and they have to pass these additional costs on to their customers.
As the costs of goods and services rise, workers demand higher wages, putting further pressure on corporate profit margins.
In an attempt to cope with growing inflationary pressures, central banks around the world are beginning to raise interest rates. These actions are intended to increase the cost of borrowing for consumers and businesses, thereby reducing demand.
So over the next few months, many companies may face a challenging environment of falling demand and rising prices. Businesses cannot pass on higher costs to consumers if consumers are unwilling to spend their money.
If corporate profit margins are under pressure, investors might decide to start selling high-flying growth stocks. This has already started to happen and the sale is spreading to other parts of the market.
If the trend of rising prices and stagnant consumer demand continues through 2022, I think the trickle of investors selling will turn into a flood. This could trigger a stock market crash.
That being said, there is no guarantee that the market will collapse or even decline over the next 12 months. The market could surprise everyone and climb another 20%. It is impossible to say at this stage.
Therefore, as I prepare for a stock market crash in 2022, I am not going to sell all my investments and sit on cash.
Stock market crash strategy
Instead, I’m doubling down on the approach I’ve taken for the past decade. I seek to invest my money in high quality businesses with large profit margins and substantial competitive advantages. Companies that exhibit these qualities should be able to navigate the economic environment relatively well, although there is no guarantee that they will outperform.
Some of the organizations that I believe exhibit these qualities include Swiss Group Watches and Burberry. These companies target affluent consumers, who are more likely to continue spending than other income groups.
I would also buy stocks in the trade Mark & Spencer. This company also targets high-income consumers and has the ability to cut costs if margins come under significant pressure.
Still, none of these companies will be immune to some of the challenges outlined above, so I’ll keep an eye out for risk factors such as rising prices going forward.
The post Here’s why I’m bracing for a stock market crash in 2022 appeared first on The Motley Fool UK.
Rupert Hargreaves has no position in any of the stocks mentioned. The Motley Fool UK recommended Burberry. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.
Motley Fool United Kingdom 2022