All things considered, 2021 has been pretty kind to UK investors. Bar a few wobbles along the way, many companies have recovered well from the coronavirus market crash of March 2020.
That said, I’m keeping my tin hat very much to hand. Here are five potential reasons why stocks could tumble once more in 2022.
Omicron takes hold
Despite Boris Johnson attempting to turbocharge booster vaccinations before the end of the year, many medical experts now believe that the UK is destined for a very unpleasant jump in infection levels come January.
Is another lockdown on the way? Never say never. Regardless of the restrictions that might be introduced, however, none of this will be good news for the vast majority of businesses. Airlines, pub stocks and retailers will likely be hammered. Again.
Yesterday, it was reported that inflation in the UK had hit a 10-year high due to a toxic cocktail of issues including supply chain woes, lack of staff and the ending of furlough.
None of this will be resolved overnight. The more costly raw materials are, the more businesses will attempt to pass this on to the consumer. And the more expensive things get, the less demand there is, even if wages are going up.
As a result, the earnings of many UK companies could suffer. And when this happens, share prices don’t do well.
….and rising interest rates
Of course, one way to tackle inflation is to raise interest rates (as the Bank of England has just done). The problem is that rates have been so low for so long, many of us have got used to them, including growth-oriented businesses. Being able to borrow money to fund, say, research and development has been almost too easy.
The outlook may not be so good, especially if a company isn’t yet profitable. Cue extra pressure on share prices.
Speculation hits the fan
Meme stocks, cryptocurrencies, non-fungible tokens — they’ve all attracted insane amounts of cash in 2021. A lot of this has come from younger traders, keen to mimic the (apparent) riches of those posting on Reddit threads such as WallStBets.
I can’t help but think this won’t end well. A bit of speculation is inevitable, but the strategy of paying no attention to fundamentals and relying completely on someone else paying more for something than I did is risky in the extreme.
Too much froth
A fifth reason is that the valuations of many stocks — particularly across the pond — are looking very frothy. The Schiller P/E (a metric that uses the average earnings for the S&P 500 over 10 years, adjusted for inflation) has only been higher just prior to the dotcom market crash. The index is also being propped up by just a few tech titans.
When valuations are excessive, perfect execution is demanded. No business is perfect.
Would any of this matter?
In the short term, yes. It’s not easy to awaken to a sea of red in one’s portfolio or watch its value fall for days. I’ve been there.
However, I’m also confident that none of the above will stop me from investing. Stock market crashes are par for the course. To win this game, I need to buy quality shares when others are selling. Another big capitulation might offer me that opportunity.
Make no mistake… inflation is coming.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.