Will the Stock Market Crash in 2022? 10 Risk Factors

Watch these stock market risk factors.

Less than a month into 2022, the S&P 500 was down about 8% from its all-time highs at the start of this year as of Jan. 24. But while January has been a bumpy ride for investors, it's still a far cry from the blue-chip index's 34% crash in February and March 2020 or its nearly 50% crash during the financial crisis in 2008 and 2009. Fortunately, periodic 5% to 10% market pullbacks are a perfectly normal part of a healthy bull market. Still, the January market weakness has investors concerned that the next market crash could be just around the corner. Here are 10 catalysts that could trigger an S&P 500 sell-off in 2022, according to DataTrek Research.

Seasonal weakness.

February is one of the worst months for the S&P 500, historically speaking. Since 1950, the index's average February return has been a loss of 0.09%. When the market has crashed in the past, February has been a particularly bad month. The S&P 500 dropped 8.4% in February 2020 during the pandemic crash, 10.9% in February 2009 during the financial crisis and 9.2% in February 2001 during the U.S. recession. Fortunately, February isn't always bad news for investors. The S&P 500 gained 2.6% in February 2021 and 3% in February 2019.

Geopolitical event.

DataTrek Research co-founder Nicholas Colas says unexpected geopolitical events are always risks for investors. Geopolitical events can be difficult to predict, but there are several reasons for investors to be uneasy in early 2022. Russia has been amassing troops at the border with Ukraine. A full invasion, President Joe Biden has said, would result in unprecedented U.S. sanctions on Russia. North Korea is also reportedly considering a return to nuclear weapon and long-range ballistic missile testing. Finally, escalating tensions between China and Taiwan could put U.S. supply chains in significant risk.

Oil shock.

There have been several oil shocks in recent decades 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 1991 each caused oil prices to double. Oil prices as high as $140 per barrel even contributed to the economic crisis in 2008. Colas says oil shocks have caused more recessions than any other catalyst over the past 50 years. The price of crude oil is up about 60% in the past year and hit a seven-year high in January.

Pandemic-caused economic lockdown.

When considering the trigger for the next stock market crash, it makes sense to look back at what caused the previous one. From its mid-February 2020 high to its bottom on March 23, the S&P 500 dropped about 34% due to panic over the spread of COVID-19. Today, the world is fortunate enough to have multiple effective vaccines against the virus, but the omicron variant is still spreading rapidly and pressuring hospitals. If the outbreak worsens or a new, vaccine-resistant variant necessitates a return to economic shutdowns, investors could be in for a repeat of March 2020.

Disappointing earnings.

S&P 500 companies are on track to report about 45% earnings growth for calendar year 2021, according to FactSet, but those year-over-year growth numbers come off a base of low 2020 earnings during the pandemic lockdowns. Looking ahead to 2022, analysts expect 9.4% S&P 500 earnings growth. The S&P 500's forward price-earnings ratio of about 22 is already above its five-year average of 18.5, and investors anticipate aggressive Federal Reserve interest rate hikes this year. If earnings growth falls short of market expectations, the stock market's reaction could be severe.

Policy change.

There are several potential sources of negative political news in 2022. The Federal Reserve could mistime comments or actions related to reducing its balance sheet or raising interest rates. Biden has proposed raising the corporate tax rate from 21% to 28%, which would negatively affect earnings. U.S. sanctions on China, Russia or North Korea could generate negative economic fallout. In addition, Baird recently noted that U.S. presidential administrations often pursue policies that "motivate their base but tend to be anti-growth" in the first half of midterm election years, and the possibility of a shift in power in Washington creates uncertainty on Wall Street.

Chinese economic slowdown.

While the U.S. has plenty of near-term economic hurdles at home, Colas says investors should also keep an eye on China. The U.S. Federal Reserve is likely to raise interest rates and sell assets in 2022, but China recently cut interest rates and injected liquidity into its banking system to combat slowing economic growth. China expects its gross domestic product growth to slow from 8.1% in 2021 to just 5.5% in 2022. China has also been hurting its own stock market by cracking down on domestic tech stocks. Finally, the International Monetary Fund has warned that China's aggressive "zero-COVID" policy appears to be taking a toll on its economy.

Elevated inflation.

Inflation has been a major topic of debate on Wall Street in recent months. The most recent monthly consumer price index reading indicated 7% inflation compared with a year ago -- the largest year-over-year increase since 1982. Fed chair Jerome Powell recently said supply chain normalization should help ease inflationary pressures in 2022, but he noted that the Fed is prepared to take aggressive monetary policy actions to stave off inflation if necessary. Colas says he expects CPI inflation levels to remain around 7% for at least the next three months. If inflation continues to rise or if the Federal Reserve is forced to aggressively raise interest rates to keep it in check, it could be very bad news for stock prices.

Big Tech regulation.

Incredibly, Apple Inc. (ticker: AAPL), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOG, GOOGL) Netflix Inc. (NFLX) and Meta Platforms Inc. (FB) represent more than 20% of the total S&P 500 market capitalization. Regulators and politicians have been calling out these tech behemoths, alleging noncompetitive practices, for years. Big Tech companies have even been hit with fines and threatened with breakups, but their stock prices keep rising. Colas says Big Tech stocks have traded as if regulators are powerless to reduce their dominance. But if something changes to make politicians in Washington prioritize antitrust enforcement on tech companies, it could drag down the entire market.

Crypto crash.

The cryptocurrency market is valued at more than $1.6 trillion as of Jan. 25. There has been a boom in new retail traders in the past two years, and Colas says many small, inexperienced traders hold cryptocurrency investments in the same trading app portfolios where they hold stocks. Colas says inexperienced investors typically follow a similar pattern in reaction to stress in the market: They tend to sell their relative portfolio winners and buy more of their losers. If cryptos crash again like they did in 2018, these investors may sell stocks to double down on crypto, potentially pressuring the stock market.

10 risk factors for a stock market crash in 2022:

-- Seasonal weakness.

-- Geopolitical event.

-- Oil shock.

-- Pandemic-caused economic lockdown.

-- Disappointing earnings.

-- Policy change.

-- Chinese economic slowdown.

-- Elevated inflation.

-- Big Tech regulation.

-- Crypto crash.