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On September 26, 2022, the Dow Jones Industrial Average officially entered a bear market. It closed down over 20% from its high on January 4 this year. On September 30, 2022, the S&P 500 closed at its lowest point for 2022. The stock market crash for 2022 is here. September was brutal for all major indices, and it doesn’t look like October will be any better.
The US Fed hiked interest rates by 0.75 basis points for the third consecutive time in an obvious indication that it will rein in inflation at the cost of a slowing economy. Stock markets are very volatile, and a recession seems all but imminent. While stock prices of most stocks are down, tech and growth stocks have been hammered. The Nasdaq Composite plunged almost 30% this year causing panic amongst traders.
Is Another Lehmann Moment on the Cards?
The stock market plunge has taken a toll on all sectors and one bank in particular: Credit Suisse. This investment bank closed October 4 at $4.29, down almost 53% this year. It had dropped to $3.83 on September 29.
Market experts say that Credit Suisse, one of the world’s largest banks, could be under significant financial stress, and we could be looking at a repeat of the Lehmann crisis. This could mean a stock market crash in 2022.
Credit Suisse’s condition has repeatedly brought up three dreaded words to the mainstream: Credit default swaps (CDS). This means banks (like Credit Suisse) borrow money to continue doing business. Lenders that lend them this money buy a form of insurance called CDS. The providers of these CDSs will pay lenders if banks default on their payments. How do you know a bank is likely to default on it? You check out the premiums on these products. The higher the premium, the riskier the loan.
Currently, the premium on Credit Suisse’s CDSs’ is even higher than in 2008 when multiple banks faced runs. Credit Suisse’s CEO Ulrich Koerner sent a memo to the bank’s employees last week that said, “I know it’s not easy to remain focused amid the many stories you read in the media — in particular, given the many factually inaccurate statements being made. That said, I trust that you are not confusing our day-to-day stock price performance with the bank’s strong capital base and liquidity position.”
This sounds eerily similar to the sounds that the CEO of Lehmann made in 2008 before it went under. That’s why analysts are expecting a slowdown in 2022.
Global Factors at Play
It’s more than Credit Suisse that can cause a stock market crash in 2022. Four significant factors can cause a market correction.
- A recession in Europe is inevitable. The Eurozone is grappling with high inflation, and energy prices have shot through the roof. The UK’s new Prime Minister, Liz Truss, has not endeared herself to anyone with her latest economic policies that cut taxes and increase deficits.
- China’s property crash has been called a slow-motion financial crisis by The Financial Times. This article said, “Contagion is spreading into the deep tissue of China’s political economy. What began as a property crisis — characterized by slumping apartment sales and a rash of debt defaults by developers — is now morphing into a financial crunch at the local government level.”
- Reuters said that the strengthening US dollar “is creating an ‘untenable situation’ for riskier assets that could end in a financial or economic crisis, strategists at Morgan Stanley warned.”
- Inflation in the US is still at very high levels, and it will take a lot of time before it returns to the Fed’s target of 2%. Investors expecting a soft landing are very likely to be disappointed. Volatility in markets will continue.
One positive from all this volatility and downturn is that investors will have several opportunities to buy good stocks at bargain prices. As of October 5, Apple was down almost 20%, Microsoft was down over 25%, Amazon was down nearly 30%, and Tesla was down almost 41% in 2022.
What Numbers Will Indicate a Stock Market Crash in 2022?
October will be a crucial month, complete with numbers that could indicate a stock market crash in 2022. First up is earnings season. Companies will start releasing third-quarter reports for 2022. Apart from their numbers, investors will focus on the future and the companies’ outlook. We could see a Black Monday type of event in October.
Investors will watch company guidance figures closely for what the last three months of 2022 hold. Since the economy will likely slow down, the outlook for 2023 corporate profits will not be very high. Very rich company valuations will likely moderate in the last quarter.
Wedbush analyst Dan Ives said that tech stocks, in particular, will hold the key to markets.
There will be two outcomes from these reports for tech players. His report said, “3Q earnings season will either expose the negative underlying fundamentals across the tech space and cause massive earnings cuts into 2023 along with further multiple compression OR instead prove that the bearishness and the demise of growth tech were premature and many pockets of tech are holding up well despite the dark storm clouds.”
Ives added, “We compare investor negative sentiment today to what we have seen only two other times in our decades of covering tech stocks: 2008 and 2001.”
Market participants will also watch the September CPI (Consumer Price Index) report scheduled for release on October 13. The US Fed, however, prefers data from the PCE (Personal Consumption Expenditures) index. This dataset will be out on October 28.
Morgan Stanley’s Michael Wilson said the S&P 500 could fall between 3,000–3,400. On October 5, it closed at 3,783. The predicted fall indicates a further drop of 10-20%.
His prognosis is slightly alarming. He said, “We remain highly convicted in our view that the bear market in stocks will not be over until the S&P 500 reaches the range of our Base and Bear case tactical targets – i.e.,3000-3400, later this fall.”
For US markets, it all boils down to inflation numbers. The US Fed will continue with its rate hikes. That is certain. Bulls will hope that inflation data is better than expected so that the Fed can make smaller hikes.
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