Through Nov. 21, the S&P 500 is already down 17.1% — including dividends — in 2022.
Even so, while the stock market has certainly underperformed this year, the pullback in the S&P 500 is nowhere near the index’s 34% plunge in March 2020 or its 50% plunge in the Great Recession of 2008-2009.
That’s the thing with stock investing, especially for the long haul.
There will be periodic pullbacks and cyclical downturns, which are a perfectly normal part of a healthy market. However, the 2022 market weakness up to this point has investors worried that the next big move for the stock market could drive stock prices down even further.
Here are seven risk factors that could trigger an even deeper stock market crash in 2023:
- Interest rates
- Disappointing earnings
- Geopolitical event
- Cryptocurrency crash
- Oil shock
- Supply chain disruption
In October 2022, the annual US inflation rate stood at 7.7%, down from 8.2% the previous month.
These are alarming numbers and are a big reason why inflation has been Enemy No. 1 for investors, buyers and the Federal Reserve in 2022.
In the central bank’s November decision to raise the key lending rate by 75 basis points, Federal Reserve Chairman Jerome Powell noted that the Fed is “strongly committed” to reducing inflation to a “target” of 2% set by economic politicians.
While year-over-year inflation eased in October, if inflation rebounds or if the Federal Reserve is forced to continue to aggressively raise interest rates to keep it in check, that could be a negative scenario for bond prices. actions.
Inflation has already forced the Federal Reserve to raise its target federal funds rate to a range of 3.75% to 4% in early November, but Powell suggests the central bank still has work to do. do to put inflation back in the right direction.
Economists are not ruling out further interest rate hikes in early 2023, especially if inflation remains elevated. According to JPMorgan Chase & Co., the Federal Reserve will raise interest rates by 50 basis points in December 2022 and hike rates another 25 basis points at each of its first two meetings in 2023.
S&P 500 companies posted tepid earnings growth of 2.2% in the third quarter of 2022, a weak number compared to earnings growth of 47.4% for calendar year 2021, according to FactSet.
While analysts had expected growth to slow in 2022 even before the macroeconomic backdrop deteriorated in the first half of the year, few analysts expected to see the entire S&P 500 plunge 17%.
The status quo is shaky for the stock market as investors brace for further interest rate hikes from the Federal Reserve in 2023. If earnings growth continues to lag behind expectations, the stock market reaction could be severe.
The biggest geopolitical event of 2022 was the Russian invasion of Ukraine, which rocked global financial markets and remains a huge wild card for investors.
In the worst case, what some have called a proxy war between the United States and Russia could escalate into a global nuclear war. But even a full-blown Russian victory in Ukraine or the annexation of Ukrainian territory could be enough to trigger a sell-off in the stock market.
In addition to the Ukrainian conflict, escalating tensions between China and Taiwan could put US supply chains at risk. And the saber-rattling between Serbia and Kosovo in early 2022 has rocked an already fragile Balkan region, with the prospect of a military conflict escalating.
The US midterm elections in November were also a major potential geopolitical market catalyst, as voters split Congress between the two major US political parties, barely yielding the Senate to Democrats and the states’ House of Representatives. Join the Republicans.
All of this shows that geopolitics is complicated and often unpredictable. This lends itself to shocks to the downside, as few surprise geopolitical developments are blatantly positive.
The collapse of FTX, one of the world’s leading cryptocurrency companies, turned the cryptocurrency market upside down in 2023.
The value of the global cryptocurrency market has already fallen from a peak of over $2.9 trillion in November 2021 to below $888 billion in November 2022, a scenario industry analysts are calling a “crypto winter.”
Investors are dumping crypto assets as investor confidence dissipates, leading to a run on major cryptocurrency exchanges in late November. Bitcoin, for example, saw its price jump to over $20,000 just before the FTX implosion. Days later, Bitcoin prices dropped to around $16,000 as investors headed for exits due to the FTX situation.
There have been several oil shocks over the past decades that have negatively impacted the stock market to varying degrees. The 1973 Saudi oil embargo created temporary shortages in the United States.
Iran’s Islamic revolution in 1979 and the first Gulf War in 1990-1991 caused the price of oil to double. Oil prices as high as $140 a barrel even contributed to the economic crisis in 2008. Oil shocks have been some of the most common catalysts of US economic downturns over the past 50 years.
At around $82 a barrel, the price of crude oil is up about 20% over the past year but peaked at $123 in early 2022 before falling back to $75 a barrel in late November. This scenario underscores the volatile nature of global energy markets heading into 2023.
Supply chain disruption
A major driver of inflation in 2022 has been the disruption of global supply chains, particularly in China, Russia and Ukraine.
In China, the government’s strict “zero-COVID” policy has included periodic lockdowns of regions and major cities, cutting off US suppliers and leading to chip shortages and other supply issues.
Russia and Ukraine are major global suppliers of oil and gas, along with grain and other agricultural products, including fertilizers.
The basic law of supply and demand suggests that supply disruptions lead to higher prices and inflation. Many US companies are at the mercy of their international suppliers, creating significant risk in the market.
This scenario is expected to change for the better, but supply chain disruption is projected to continue in 2023, with 52% of business executives saying their supply chains “need a lot of improvement” and around 33% saying that supply chain headaches will last through mid-2023, according to a recent report from SAP SE.