Most people are familiar with the 2020 stock market crash caused by the Covid-19 pandemic. Software, natural gas, real estate, entertainment, hospital, and healthcare stocks were all affected.
While there was an expected gradual recovery in 2022, the stocks are still not doing well. The S&P 500 have gone down 20% since the beginning of the year.
The tech industry is concerned about the current market outlook. Economic growth prospects are dwindling, and most tech stocks avoid risk by pulling back from parts of the stock market that are sensitive to inflation.
This is not the short-term stock market volatility as the market movement is going further downwards, and it is a great concern among investors. So what is causing the crash?
1. Inflation
The high inflation in the U.S. is one of the reasons behind the market crash. The price of goods and services has constantly been increasing, leading to increased market volatility. The latest consumer price index (CPI) increased by 8.3%.
Interestingly, the CPI increased, coming closest to the highest CPI level experienced in America in over four decades. The high inflation is a burden to the consumers, especially because there is no increase in wages to cushion them.
Inflation has also affected companies following the increase in prices of products, raw materials, labor, and transport. As much as the companies’ earnings are growing compared to the past two years, the profit margins are being affected by inflation.
High inflation has affected the consumers’ purchasing power and confidence, which will see a slower economic growth; the ripple effect is a decline in share prices.
2. Supply Chain Challenges
Like in the Covid-19 times, supply chain issues are one reason behind the market crash. While most of the supply chain issues experienced during the pandemic have been addressed, the fact remains that there are residual global supply chain issues companies are dealing with.
For instance, there are new Covid-19 developments in China, characterized by lockdowns causing supply chain disruptions affecting companies like Apple. The supply chain issues triggered by the global health crisis continue to persist in 2022.
Manufacturers are still yet to catch up with the level of production before the Covid-19 pandemic due to many factors like the shortage of labor, raw materials, and even power. The demand for consumer goods and services has also shifted; for instance, people have reduced eating out. You can imagine the financial impact this has on the hospitality industry revenues.
Due to the supply chain disruptions across multiple industries, companies have opted to reduce production, which has created supply chain issues. Consumers are purchasing at higher prices.
The Russia-Ukraine war has also presented new supply chain challenges due to the business sanctions placed on Russia and the cutting off of exports from Ukraine, one of the largest producers of agricultural exports.
3. Increasing Interest Rates
The ongoing inflation has been a great concern, and policymakers like the Fed are looking to reduce inflation. Their solution is to tighten the monetary policy by increasing the interest rates.
As much as the increase in interest rates is designed to pressure equities, it affects stocks. Note that when the Fed increases interest rates, the stock market goes down. The reverse is true; the stock market goes up when the Fed cuts the rates.
Following the rising interest rates, companies’ reaction is reducing spending, resulting in an economic slowdown. Corporate earnings may also moderate, affecting the stock prices.
4. China’s Renewed Health Crisis
The resurgence of the Covid-19 cases in China has created an economic drag, which has impacted the stock prices. China’s zero-Covid-19 policy is designed to reduce the spread of the virus, and it features lockdowns and mass testing.
The policy has had an economic impact on China, resulting from the reduced exports. The imports have also been stagnant due to restricted demand. Production in factories has also significantly slowed down due to labor shortage, and there are major shipping delays too.
The pandemic has contributed to the global supply chain challenges, resulting in low supply and increased prices of goods. The decline in business activity in the country exposes the stock market to a crash.
5. Russia-Ukraine Geopolitical Tension
The Russia-Ukraine war has caused market volatility globally. Many countries globally rely on Russia’s oil. Because of the business sanctions placed on the country, the global oil supply has declined, creating pressure on available resources and leading to inflated prices.
This has been a burden on manufacturing businesses that have incurred higher manufacturing and transportation costs. This has resulted in slower growth and lower profits affecting the stock prices.
Take Away
Due to supply chain issues, geopolitical tension, inflation, and high-interest rates, production and business activity have slowed down, and a lot of pressure is put on companies’ earnings. The decline in earnings has affected the stock prices creating volatility in the stock market.
