I think the chances of a stock market crash in 2022 are growing.
I believe a couple of factors could contribute to a market decline over the next couple of months. The most pressing is inflation. Prices are rising worldwide as the supply chain crisis forces companies to rethink their pricing strategies.
At the same time, the prices of essential commodities have jumped over the past 12 months. This is also pushing up the cost of production for many companies, and they have to pass on these additional costs to their customers.
As the costs of goods and services increase, workers are demanding higher wages, and this is putting further pressure on corporate profit margins.
To try and deal with rising inflation pressures, central banks around the world are starting to increase interest rates. These actions are designed to increase the cost of borrowing for consumers and businesses, reducing demand.
Challenging environment
As such, over the next few months, many companies could face a challenging environment of lower demand and higher prices. Businesses cannot pass higher costs on to consumers if consumers do not want to spend their money.
If corporate profit margins come under pressure, investors could decide to start selling high-flying growth stocks. This has already started happening, and the selling is spreading to other parts of the market.
If the trend of rising prices and stagnating consumer demand persists throughout 2022, I think the trickle of investors selling will turn into a flood. This could ignite a stock market crash.
That being said, there is no guarantee that the market will crash or indeed decline over the next 12 months. The market could surprise everyone and rise another 20%. It is impossible to tell at this point.
Therefore, while I am preparing for a stock market crash in 2022, I am not going to sell all of my investments and sit on cash.
Stock market crash strategy
Instead, I am doubling down on the approach I have been following for the past decade. I am looking to invest my money in high-quality firms with large profit margins and substantial competitive advantages. Companies that exhibit these qualities should be able to navigate the economic environment relatively well, although there is no guarantee they will outperform.
Some of the organisations that I believe exhibit these qualities include Watches of Switzerland Group and Burberry. These companies target affluent consumers, who are more likely to continue spending than other income groups.
I would also buy shares in retailer Marks & Spencer’s. This company also targets higher-income consumers and has the flexibility to cut costs if margins come under significant pressure.
Still, none of these businesses will be immune from some of the challenges outlined above, so I will be keeping an eye on risk factors such as rising prices going forward.