To save investors from crying, the FTSE 100 & FTSE 250 have reaffirmed their previous-year recovery. Between the Christmas season and 2021, they have increased by 11pc each and 12pc respectively.
However, further gains may be limited by several risks that increase the probability of a stock market crash in 2022.
Notably, the consumer prices index (CPI ) has risen to its highest point in over a decade. In recent weeks, the Bank of England revised its forecast upwards so that it now anticipates CPI inflation to rise to 6pc by April.
Inflation has already led to a rise in interest rates. Additional tightening of monetary policy could make shares less attractive relative to other assets. This could have a negative impact on the performance of the stock market in the first half of next year.
The pandemic continues to be a threat to the economy. It is not yet clear if the new Covid variant, omicron, will result in lockdown measures that could disrupt the performance of a number of industries.
Even more uncertain is how investors will react to any reintroductions of Covid containment. The high valuations of stocks suggest that they don’t have enough safety margin in case trading conditions change.
Some investors believe that the stock markets will bring joy to the entire world in 2022 if it continues its recent gains. The economy may benefit from additional fiscal stimulus to address the pandemic. In the same way, monetary policy might be less hawkish during periods of high inflation because of ongoing uncertainty in economic conditions.
A wide range of stocks trades at very modest valuations. In the next few months, industries that were hardest hit by the pandemic or have not seen the benefits of the shift towards sustainability and online growth trends could see a recovery.
It is difficult to predict whether the stock market will soar, crash or remain stagnant next year or any other year. Instead of trying to predict whether the bull market will continue another day, investors could focus on buying shares as they become available.
Questor believes that such buying opportunities are more likely to arise during a market crash. While stock prices fall rapidly, a greater number of quality companies may be undervalued. In extreme market conditions, the share prices of company shares can diverge significantly from their underlying values.
This could mean that investors have access to a wide range of buying opportunities, which can help them fulfil the first part in a long-term “buy low, sale high” strategy.
A falling stock market in 2022 could cause significant paper losses, which could be a problem for investors as they drive home for Christmas. But, net buyers of shares are expected to make up a significant portion of investors in the next year.
A portfolio of stocks can provide regular income for retirees. However, they may be able to buy more shares than they need due to the lack of investment opportunities in other asset types and partial reinvestment.
A stock market crash next spring could prove to be a boon for many long-term investors.
Many investors will instinctively believe that they want a continuation in the bull market. But net buyers may only need one thing. A stock market crash may provide more buying opportunities, which could ultimately lead to higher profits.
