As 2022 has advanced, I have grown increasingly concerned about US stock valuations. History has taught me that highly elevated asset prices usually lead to fragile markets. From October onwards, I wrote a host of articles warning that the risks of a stock market crash were increasing steeply. It gives me no pleasure today to see US stocks considerably below their 2021-22 peaks. But just as bubbles eventually burst, overvalued assets often fall steeply in value.
My fears were fuelled by several concerns, including irrational speculation in risky assets, highly rated US tech stocks, and rising interest rates. I also explained that I was, “genuinely terrified [of]…armed conflict…between Russia and Ukraine, as we saw in 2014”. Horribly, the last of those fears came true, as President Putin’s Russia invaded a European country of 44m people. So, with the US stock market having fallen in January and February, is a global stock market crash now a certainty in 2022?
Stock market crash: the S&P 500 slides
On 3 January, the US S&P 500 index hit an all-time high of 4,818.62 points. On Monday, it closed at 4,373.94 — down 444.68 points (-9.2%) from its record peak. A 10% post-peak decline is described as a correction. Only a fall of 20%+ counts as a full-on stock market crash. Right now, I can easily see the US market falling to 3,854.90 points, at which point it would be in a so-called bear market.
The Nasdaq turns nasty
As investing legend John ‘Jack’ Bogle remarked, “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks”. The Nasdaq Composite index is certainly heading that way right now. The tech-dominated index peaked at 16,212.23 points on 22 November 2021. On Monday, it closed at 13,751.40, down 2,460.83 points (-15.2%). With under five percentage points to go to a Nasdaq stock market crash, we’re almost there.
The FTSE 100 is holding up well
In January and February, the S&P 500 (-5.3% and -3.1%) and Nasdaq (-9% and -3.4%) both declined. To me, this is hardly surprising, given their extreme overvaluations in late 2022. However, on this side of the Atlantic, things are looking rosier. The UK FTSE 100 index ended 2021 at 7,384.54 points. As I write, it stands at 7,388.42 — up 3.88 points so far this year. This tiny gain is still way better than the losses racked up by owners of US stocks. It also vindicates my earlier argument that while US stocks looked expensive, UK shares seemed cheap. That’s why I’m less convinced that a UK stock market crash will hit in 2022.
This is a real stock market crash
To see a really shocking stock market crash live, I’ve been monitoring the Russian stock market since the invasion of Ukraine. On Thursday, the RTS market index halved, before rebounding to close down around 28%. It inched up again on Friday, but the Russian exchange has been closed since Friday. If and when it reopens, I expect Russian stock prices to collapse spectacularly. This is the sort of brutal stock market crash that only gruesome geopolitical events can trigger.
I’m ready to buy big
In the latter half of 2021, we decided to ‘de-risk’ our family portfolio. We stopped investing our spare cash into global and US stocks and started hoarding it. Today, we are building an ever-larger cash pile to buy cheap UK shares. Indeed, I still see many bargains today, especially among FTSE 100 dividend shares!