Is a stock market crash already here? The S&P 500 Index and the Nasdaq Composite Index have declined more than 9% and 14%, respectively, year to date. A gradual decline of up to 10% shows that investors are fearful and are pulling money out of the market. When this fear turns into panic selling, that is when the stock market crashes.
What Causes a Stock Market Crash?
A stock market crash often occurs during periods of uncertainty and or tense macro-economic environments. The rapid or gradual decline of equities is often caused by underlying fear and panic selling. This can cause stock prices to fall 20% or more within days, giving you no room to exit. A market crashes when a catastrophic event hampers the business environment and creates panic among investors.
Investors feared the pandemic in 2020, and now they fear a war-like situation from the Russia-
Ukraine conflict. Plus they fear an accelerated interest rate hike by the U.S. Fed. Hence, they are gradually selling risky assets that could lose money in a tense geopolitical environment. They are also selling stocks where the business cannot pass on the rising cost to customers. Hence, why high multiple tech stocks saw a sell-off in January 2022. The tech-heavy NASDAQ underperformed the S&P 500 Index.
One question in everyone’s mind is whether a stock market crash is coming?
Is a Stock Market Crash Coming in 2022?
The situation is tense between Russia and the United States. Russia doesn’t want Ukraine to join North Atlantic Treaty Organization (NATO). The United States, Europe, and Canada created NATO to provide collective security against the Soviet Union (Russia). Russia and the United States are deploying military troops across the Ukraine border. Russia is threatening to invade Ukraine, and the United States is threatening to impose sanctions on Russia.
Europe depends on Russia for 39% of its natural gas needs. Russia could stop exporting oil and natural gas. If this happens, there could be an acute oil and natural gas supply shortage as it would take time for other oil producers to increase supply. As oil becomes expensive, so does logistics, putting pressure on the profit margin of companies that cannot pass this cost. Industries that cannot afford such high oil prices could delay production.
Hence, any developments in the Russia-Ukraine conflict will impact oil prices and the stock market. If Russia stops exporting gas and there is a war, the stock market could crash (fall over 20%) within a week or 10 days. This is because a war would divert all resources in that direction. Airlines, hospitality, and tourism would be the hardest hit. At such times, oil, food, and gold stocks would flourish.
So a stock market crash is likely. Like all crashes, it would come if the United States or Russia announce a war.
How to Mitigate the Risk of a Market Crash?
In times of crisis, it is the daily essentials that win. Energy stocks would be a clear winner in the U.S, U.K., Russia feud. Analysts fear that an oil supply crunch could push oil prices above $125/barrel. Similarly, the energy-heavy TSX Composite Index outperformed the tech-heavy Nasdaq.
Canada’s largest integrated oil company Suncor Energy stock has surged 11.5% year to date. This stock is already close to its 52-week high. In a normal scenario, I would avoid buying a cyclical stock like Suncor at its 52-week high. But 2022 is a year of oil. Moreover, Suncor plans to increase its dividend at a compounded annual growth rate (CAGR) of 25% between 2021 and 2025. It already doubled its dividends in 2021.
Another good stock for crisis is Barrick Gold. For years, gold has been considered a safe-haven stock. Gold price tends to rise when the macro-economic conditions are tense and shake investor confidence. This stock is not a good bet in a growing economy, but a hedge in crisis. The stock surged 47%-50% in the 2007 financial crisis and the 2020 pandemic crisis.
But the stock surged 219% in the 2015 oil crisis when Canada entered recession. Don’t buy more than 5% of your portfolio into gold stocks as the surge is often short-lived. And don’t forget to book profit on the first fall in the stock price.
Conclusion
The probability of a stock market crash hinges on how the talks between the U.S. and Russia proceed. But a market crash is not bad news if you have the right stocks that hedge your portfolio. So don’t fear a crash, embrace it, and use it as an opportunity to buy value stocks.
