It’s been a dismal start to the year for the stock market. The Nasdaq narrowly escaped its worst-performing January in history, while the S&P500 fell by 9.8% in January, missing the bear market territory by only .2%. Most investors have been committed to buying the dip, hoping that the stock market will have a ‘violent rally‘ in the next few weeks. However, that doesn’t appear to be the case; the dip just keeps on dipping. Analysts are also warning that the catastrophic stock market crash isn’t over yet and that dip-buyers should buckle up for a wild ride. So, are we headed back to March 2020 prices? Why is the stock market crashing? Here are some of the reasons:
In This Article
1. Disappointing earnings and grim guidance
The disappointing results started with Netflix. Despite beating earnings expectations, the stock dropped a staggering 23% after the company’s expected subscriber growth of 2.5 million in Q1, fell below analysts’ expectations of 6.93 million.
Next on the list of poor performers is Paypal. Paypal’s stock tumbled 25% –the most on record– after reporting Q4 earnings and Q1 guidance that fell short of Wall Street expectations. While the company beat earnings expectations by about $30 million, they reported a Q4 EPS of $1.11, narrowly missing estimates of $1.12. Bad news from Paypal continued when they forecast that they’ll be experiencing headwinds well into the first half of 2022 because eBay will be migrating transaction volume away from Paypal.
Now, let’s talk about the mother of all disappointments: Meta Plaforms Inc. – formerly Facebook – whose stock has fallen off a clip since it released its Q4 performance. The stock price has tumbled 25% on missed earnings and a grim future outlook. Yet, Meta is one of the top two stocks held by large-cap equity funds and is threatening to put them on the front-line of what might be the worst stock tumble in history.
All these disappointing earnings reports are causing funds to grow increasingly bearish other giant stocks such as Apple and Microsoft, erasing all the gains they had made after reporting excellent results. Media and other tech stocks haven’t been spared either as Spotify, Snapchat, and TradeDesk follow suit. And this seems to be the main reason why the stock market is crashing.
2. Falling employment rates
A jarring employment indicator report came out yesterday reporting that employers cut 301,000 jobs in January. The private payrolls report was well below the expected increase of 207,000 jobs and came right after 776,000 jobs were added in December 2021. It also marks the first time payroll figures have decreased since December 2020.
While Omicron is to blame, falling employment rates signal a less than ideal economic recovery and could even signal that inflation might persist for even longer.
As we see record-high vacancies in the labor market, the last thing you want to see is people dropping out of the workforce as this causes wage inflation.
Any signs of additional inflation certainly spook investors and might be the other reason why the stock market is crashing.
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3. Anticipation of interest rate hikes
Stock market investors do not like the idea of rising interest rates. High-interest rates deter businesses from borrowing money, thus hindering growth.
In addition, consumers spend less during such periods, which means business profits go down.
Since Jerome Powell indicated that the Fed policymakers are likely to raise interest rates in March, the stock market has seen nothing but decline after decline.
Rising interest rates also make other investments, such as bonds, more attractive than stocks. So investors begin to sell their high-risk stocks waiting for the right time to get into bonds.
The stock market now seems to be pricing in almost five interest rate increases by the end of 2022.
Read More: What Happens When Interest Rates Rise?
4. Glooming economic recovery
The IMF(International Monetary Fund) predicts that the world economy’s growth rate will slow down to 4.4% this year from the earlier projected 4.9%.
The slowdowns will be led by the US and China as high inflation and supply chain bottlenecks continue to stifle the two countries.
Earnings call after earnings call has revealed that supply chain constraints are likely to persist well into the second half of 2022.
Paypal, for example, mentioned that inflationary pressures impacted spending within certain segments of their user base. This means that consumers no longer have money to spend, and it’s a red flag, not just for Paypal but also for the economy.
In its earnings call, Starbucks made several mentions about the Omicron variant amplifying the already existing inflationary costs and staffing shortages. They also said they’ve been experiencing a rapid increase in supply chain costs.
Until all these issues ease their way out, we’ll continue to see a glooming economic recovery.
5. Russia and NATO/US tensions
Russia has been rattling its sabers and beefing up its military posture on the border with Ukraine.
There seem to be signs that Putin could invade Ukraine, and if this happens, it will drag the US and NATO into a war.
While the stock market typically shrugs off war, it seems like investors are starting to pay attention to this conflict, all because of commodity prices.
Russia is Western Europe’s leading supplier of natural gas. We’ve already seen gas prices spike, but the volatility will be on another level should there be a full-fledged invasion.
Other energy costs will likely rise, too, unsettling asset prices in a far more serious way than what we witnessed in 2014 when Russia annexed Crimea.
Looking back at history, though, the stock market often quickly bounces back after a knee-jerk reaction to any geopolitical crisis. So there’s no reason to panic over this one.
6. Extremely High valuations
Let’s face it; valuations had risen to absurd highs. In 2021, indices recorded consecutive new highs, with the S&P500 hitting 68 record highs.
In December, the S&P500 traded at 22 times forward earnings, way higher than its five-year average of 18.5.
There was a high tolerance for risk, as indicated by the growth of assets like NFTs and cryptocurrencies. And the monetary and fiscal policies following the pandemic exacerbated this.
As a result, high-risk companies with neither earnings nor cash flow became extremely popular, with valuations growing to 60 times sales.
An excellent example of such a company is Crowdstrike(CRWD), whose price-to-sales ratio has now fallen to 28, and not to mention Cathie Wood’s ARK Innovation ETF, which has lost about half of its value from its all-time high.
Even though the stock market seems oversold right now, some companies like Snowflake(SNOW) still have outrageous valuations.
7. Unpredictable Macro environment
Ultimately, what we’re seeing is an unpredictable macro environment.
The Fed’s rate hikes are looming, yet investors see no road map after that.
Business earnings for the first half of 2022 are either unpredictable or projected to be lower than analyst expectations.
Michael Wilson, an analyst at Morgan Stanley, is advising clients to hunker down for a few more months as slowed earnings growth joins monetary policy uncertainty are the primary concerns of the market. He is warning that the S&P500 could fall another 10%.
Conclusion: What should you do?
It’s completely impossible to predict what the market will do and, at times, will do the exact opposite of what you think it’ll do.
The reasons we’ve mentioned as to why the stock market is crashing can attest to it. For instance, there’s no reason why Apple, Microsoft, or Tesla should be punished as they have. Also, history shows that the stock market usually shrugs off wars, yet it seems to be reacting to the current conflict in Eastern Europe.
So, it’s always better to stay the course and stick to your plan.