How to Handle a Stock Market Crash in 2022: Key Takeaways
- What causes a market crash? Time for a CRUCIAL history lesson…
- Are we headed for a market crash in 2022? Read on to learn what I think…
- Plus, 3 trading tips for how to handle a crash …
Oh, no … Can you hear that? The bears are coming!
That’s what it feels like in the markets lately, anyway. Some say we’re due for an extended pullback. To me, it’s just all guessing.
But that doesn’t mean the market won’t crash or that we can’t start preparing. If there IS a stock market crash, you need to know how to handle it. I have a few tips on exactly that. It’s also important to learn WHAT causes crashes and what might cause the next one. I’ll explain it all here. Let’s dive in.
Table of Contents
- 1 What Causes a Stock Market Crash?
- 2 Are Signs Pointing Toward a Market Crash in 2022?
- 3 3 Tips for Handling a Market Crash in 2022
- 4 How StocksToTrade Can Help
- 5 Stock Market Crash in 2022? The Bottom Line
- 6 One Platform. One System. Every Tool
What Causes a Stock Market Crash?
Before we get into whether a stock market crash in 2022 is imminent, we need a history lesson. There’s no better teacher than the past. Here are some notable market crashes and what caused them…
1929 Stock Market Crash
In 1929, the stock market crashed and pushed the U.S. into the Great Depression.
Was it THAT big of a deal? Well, it dragged on for 10 years and was the longest-lasting economic downturn the Western world had seen at the time.
So yeah, it was kind of bad.
What caused it? Investors speculated and the market grew bigger and bigger. Demand didn’t justify supply, leading to a slowdown in production. Unemployment rose, too — creating a bubble in assets.
People were also using margin to invest, thanks to their confidence in the market. They weren’t afraid to use debt to try to make more money.
But in August 1929, the government raised interest rates, which deterred investors from borrowing. The market cooled.
And panic set in … People ran to banks to withdraw money and liquidate investment accounts.
So what caused the stock market crash of 1929? Mainly overconfidence in industry, agriculture, and the markets — leading to the Great Depression and an 85% drop in the Dow. Ouch.
Keep that in mind as you consider what could cause a market crash in 2022.
1970s Market Drought
Stocks always go up, right? Not in the 1970s…
From 1966–1982, the Dow lost 73% of its value. It bottomed out during the recession of 1981–1982. That was the fourth recession in this period.
Monetary policymakers tried to fight high unemployment with high inflation. It was a disastrous decision … Inflation reached 11.05% in 1974 and 13.55% in 1980. There was a recession in both of those years.
Inflation in the 1970s led to higher unemployment and a lack of trust in the stock market…
The Federal Reserve responded by limiting the money supply to control inflation. Interest rates rose which stymied economic growth … Industries that relied on borrowing money like manufacturing and construction suffered.
Those industries laid off employees, pushing unemployment to 10.8%. Inflation was declining, however, and unemployment would eventually follow suit.
For anyone keeping score, inflation is currently pegged at 4.8% for 2021. That’s its highest mark since the 1990 recession. But it’s much lower than in the 70s and early 80s.
And it’s nowhere near ‘hyperinflation,’ which only happens in extreme circumstances. Are we seeing a similar setup that could lead to a market crash in 2022? More on that in a bit.
The Great Recession
Isn’t it funny how we call terrible events ‘Great.’ I look forward to the ‘Great Sun Explosion’ in a few billion years.
All jokes aside, thanks to rising housing prices in the mid-2000s, mortgage lenders stopped being picky about borrowers. They handed out higher-risk mortgages to hopeful homeowners with shaky credit histories.
This was a tactic to make some quick money selling mortgages. But it eventually caught up to them.
When the market for subprime mortgages dried up, mortgage lender New Century Financial declared bankruptcy.
This kicked off an avalanche for the housing market. Average home values dropped 20% from 2007 to 2009. Prices didn’t fully recover until 2013.
This is relevant today. Some believe we’re in a housing bubble now with average home prices up 21% in the past year and a half…
I think we’re in a bubble. The difference now is that it’s due to a supply and demand issue, not overexuberance in the market.
That’s a decent start on crash history. Now the big question…
Are Signs Pointing Toward a Market Crash in 2022?
The current numbers for unemployment, inflation, and overall assets don’t seem to suggest any drastic correction will come anytime soon.
But that doesn’t mean something won’t change — or that something else entirely can’t burn markets to the ground.
The stock market has been resilient since 2020’s recession. That could suggest it’s not overvalued. Some people think that things going well means a bad turn is on the horizon.
People have made that argument for over a decade now. The market has pulled back during that time, of course. But it’s not just because stocks are at all-time highs.
One concern is the rise of margin debt since the beginning of lockdowns.
A rise in margin use shows that investors want to increase gains but also have confidence in the market. But it also means that if things go south, it will be FAST and HARD.
Rapid margin debt growth seems to precede a recession, but again, that alone won’t cause a market crash.
- Let’s say we get a stock market crash in 2022. What’s a trader to do?
3 Tips for Handling a Market Crash in 2022
It’s tough to tell if we’re heading toward a stock market crash or an extended pullback. But markets are cyclical, so it’s just smart to prepare for some kind of downturn…
Here are three tips on how to handle a bear market.
Stock Market Crash Tip #1. Focus on the Short Term
So if the market crashes, it’s not like you’ll see a massive hit to your portfolio. Your portfolio should mostly be cash at the end of each trading day.
A market crash doesn’t mean opportunities go away. It just may not be the typical stocks you’re used to trading.
Stock Market Crash Tip #2. Stay Liquid
Holding stocks for a long period introduces way too many variables…
Stocks will grind higher for a while and then the market sells off. Many people panic-sell only to see the market recover a few months later.
Now they’re missing out on growth…
If you maintain a strong cash position and focus on short-term pops in the hottest stocks and sectors, you take the negative volatility that comes with a market crash out of the equation.
Stock Market Crash Tip #3. Consider Short Selling
I love dumping on stubborn short sellers. But shorting can be a great strategy — if you know what you’re doing.
When times are tough in the market, short sellers win more than anyone going long.
It can potentially be a good risk to take if we enter a stock market crash or extended sell-off, however.
How StocksToTrade Can Help
No matter if we get a market crash in 2022, StocksToTrade is here to help you thrive.
- One of the BEST ways to keep up with the news is by subscribing to our amazing Breaking News Chat feature. Our team of market pros alerts our chat room to the hottest market news every trading day.
- You can also join me in the SteadyTrade Team. I discuss market strategies every single trading day, including how to handle the bad times…
- I also send out a watchlist of stocks to watch for the week ahead every Sunday night. Sign up today!
- And there’s more! STT also offers the Small Cap Rockets and Breakouts & Breakdowns chat rooms. They give you access to lead traders who know what it takes to adapt to the market. And they explain every move they make. It’s all part of our incredible trading platform.
Check out StocksToTrade and all our great features … Start your StocksToTrade trial today!
Stock Market Crash in 2022? The Bottom Line
I hope traders everywhere feel better about the possibility of a stock market crash in 2022 after reading this…
Focusing on short-term trading can help lower your risk of being burned by a market crash. So study up. Stay liquid and learn different strategies in the meantime to prepare.
It’s impossible to predict if a stock market crash is coming and when it might arrive.
But savvy traders know there are opportunities in ANY market. You have to be willing to do the work to change and adapt to the market as it is now.
How worried are you about a market crash in 2022? Think you’re up for handling one? Let me know in a comment below!