Through Nov. 21, the S&P 500 is already down 17.1% – including dividends – in 2022.
Even so, while the stock market has certainly underperformed this year, the S&P 500 pullback is nowhere near the index’s 34% landslide in March 2020 or its 50% crash in the 2008-2009 Great Recession.
That’s the thing with investing in stocks, especially for the long haul.
There are going to be periodic pullbacks and cyclical downturns, which are a perfectly normal part of a healthy market. Still, the 2022 market weakness up to this point has investors concerned that the next big move for the stock market could take stock prices even lower.
Here are seven risk factors that could trigger an even deeper 2023 stock market crash:
- Interest rates
- Disappointing earnings
- Geopolitical event
- Cryptocurrency crash
- Oil shock
- Supply chain disruption
In October 2022, the annual U.S. inflation rate stood at 7.7%, down from 8.2% a month earlier.
Those are alarming numbers, and they’re a big reason why inflation has been enemy No. 1 for investors, shoppers and the Federal Reserve in 2022.
In the central bank’s November decision to boost the benchmark lending rate 75 basis points, Federal Reserve Chair Jerome Powell noted the Fed is “strongly committed” to getting inflation down to a 2% “goal” set by economic policymakers.
While year-over-year inflation did slide in October, if inflation rebounds or if the Federal Reserve is forced to continue to aggressively raise interest rates to keep it in check, that could be a negative scenario for stock prices.
Inflation has already forced the Federal Reserve to raise its target fed funds rate to a range of 3.75% to 4% in early November, but Powell suggests the central bank still has work to do to get inflation firmly trending back in the right direction.
Economists aren’t ruling out even more interest rate hikes in early 2023, especially if inflation remains high. According to JPMorgan Chase & Co., the Federal Reserve will raise interest rates by 50 basis points in December 2022 and boost rates by another 25 basis points at each of the first two meetings in 2023.
S&P 500 companies reported a tepid 2.2% earnings growth in the third quarter of 2022 – a weak number when compared to the 47.4% earnings growth for calendar year 2021, according to FactSet.
While analysts were expecting a slowdown in growth in 2022 even before the macroeconomic environment deteriorated in the first half of the year, few analysts expected to see the entire S&P 500 slump 17%.
The status quo is shaky for the stock market, as investors prepare for even more Federal Reserve interest rate hikes in 2023. If earnings growth continues to fall short of expectations, the stock market’s reaction could be severe.
The biggest geopolitical event of 2022 has been Russia’s invasion of Ukraine, which has rattled global financial markets and remains a massive wild card for investors.
In a worst-case scenario, what some have called a proxy war between the U.S. and Russia could devolve into a global nuclear war. But even a full Russian victory in Ukraine or annexation of Ukrainian territory could be enough to trigger a stock market sell-off.
In addition to the Ukraine conflict, escalating tensions between China and Taiwan could put U.S. supply chains in significant risk. And saber-rattling between Serbia and Kosovo earlier in 2022 upset an already fragile Balkans region, with the prospect of a military conflict rising.
The U.S. midterm elections in November were also a major potential geopolitical market catalyst, as voters split Congress between the two main U.S. political parties, barely handing the Senate to the Democrats and the U.S. House of Representatives to the Republicans.
This all goes to show that geopolitics are complicated – and often unpredictable. This lends itself to downside shocks, as few surprise geopolitical developments are unabashedly positive.
The collapse of FTX, one of the most prominent cryptocurrency companies in the world, has turned the crypto market upside down heading into 2023.
The value of the global cryptocurrency market has already dropped from a peak of more than $2.9 trillion in November 2021 to less than $888 billion in November 2022, a scenario that industry analysts are calling “crypto winter.”
Investors are dumping crypto assets as investor trust dissipates, leading to a run on major crypto exchanges in late November. Bitcoin, for example, saw its price rise to more than $20,000 just prior to the FTX implosion. Days later, Bitcoin prices fell to about $16,000, as investors headed for the exits due to the FTX situation.
There have been several oil shocks in decades past that negatively affected the stock market to varying degrees. The Saudi oil embargo in 1973 created temporary U.S. shortages.
Iran’s Islamic Revolution in 1979 and the first Gulf War in 1990-1991 each caused oil prices to double. Oil prices as high as $140 per barrel even contributed to the economic crisis in 2008. Oil shocks have been some of the most common catalysts for U.S. economic recessions over the past 50 years.
At around $82 a barrel, the price of crude oil is up roughly 20% in the past year, yet it crested the $123 mark earlier in 2022 before falling back to $75 per barrel in late November. That scenario underscores the volatile nature of the global energy markets heading into 2023.
Supply Chain Disruption
One of the biggest drivers of inflation in 2022 has been the disruption of global supply chains, particularly in China, Russia and Ukraine.
In China, the government’s strict “zero-COVID” policy has included periodic lockdowns of regions and major cities, disrupting U.S. suppliers and leading to chip shortages and other supply issues.
Russia and Ukraine are major global suppliers of oil and gas, along with wheat and other agricultural products, including fertilizers.
The basic law of supply and demand suggests supply disruptions lead to higher prices and inflation. Many U.S. companies are at the mercy of their international suppliers, creating significant risk in the market.
That scenario should change for the better, but supply chain disruption is expected to continue in 2023, with 52% of business executives saying their supply chains “need much improvement” and about 33% saying supply chain headaches will last until mid-2023, according to a recent report from SAP SE.