Are we already in what will be known as the 2022 financial crash?

Published On: May 4, 2022Categories: Latest News6.2 min read

Already into May, 2022 has been a tough year for global stock markets. On Wall Street the main indices are all down significantly since the start of the year. The S&P 500 has lost a little over 13%, the Dow Jones a little less than 10% and the tech-heavy Nasdaq almost 21%.

Here in the UK the benchmark FTSE 100 index has fared better and sits at almost exactly the same level it opened the year. It has been supported by its heavy weighting to mining and energy companies which, unlike most sectors, have had a great 2022 thanks to spiking oil and gas and metal prices.

nasdaq

Shell is up 28% this year and BP over 15%. The big London-listed miners including BHP, Glencore, Rio Tinto and Anglo American all have double figure gains for the year to date.

glencore plc

The FTSE 250’s performance has been more in line with the major American indices with the mid-cap index down 13%. Germany’s benchmark index the Dax 30 is down over 12% in 2022 and France’s CAC 40 by 10%.

So far, 2022’s stock market losses have mainly been referred to as a “correction” rather than a “crash”. Growth stocks including the Big Tech FAANG+ constituents like Meta Platforms (Facebook), Alphabet (Google), Apple, Netflix and Amazon have slid the most. However, they are also, with the exception of Netflix, worth significantly more than they were two years ago at the start of the Covid-19 pandemic.

A chunk of the gains inspired by accelerated growth as the move towards a more digital economy quickened has been given up but by no means all of it. Despite falling 27% so far in 2022, the Amazon share price is still up almost 9% on its level of May 1 2020. And almost 27% up on the record high it set ahead of the coronavirus crash that took place between mid-February and mid-March 2020.

Apple is down 13% this year but up almost 119% on where it sat 2 years ago and Alphabet has gained almost 80% over those two years. The major U.S. indices are also far ahead of where they were 2 years ago. The Nasdaq by over 45% despite falling 21% in 2022.

So while it has been a bruising 4 months so far for equities this year, particularly growth stocks like tech and biotech, they are still holding serious gains banked over the period between the recovery from the coronavirus crash and the end of last year. Other sectors like mining and energy booming are another reason why very few stock market analysts and expert commentators have used the word ‘crash’ for equity market losses this year.

But with the global economy’s near-term prospects looking increasingly gloomy and the chances of central banks being forced into raising interest rates in a way likely to catalyse a recession increasing as they try to get a grip on inflation, the word ‘crash’ is starting to be uttered in some corners. Could losses over the first four months of 2022 simply be the first stage of a crash coming in stages rather than the quicker, more dramatic collapse of valuations experienced in 2008 when the international financial crisis hit?

In April the Nasdaq dropped 13.3% for its worst month since October 2008 after the Lehman Brothers collapse. Since its most recent all-time high last November the index has shed around $5 trillion in market capitalisation.

Over the past couple of years, a buoyant tech sector has compensated for strife in other sectors of the economy over the coronavirus pandemic. But growth has now also slowed for tech companies and the rest of the economy is still struggling. Recent data out of the USA, Europe and China is ringing alarm bells.

Last month the S&P Global eurozone manufacturing purchasing managers’ index dropped to its lowest level in 15 months at 55.5 from 56.5 in March. The previous two months also represented a deterioration in the index and Eurozone growth has been described as at “near standstill”.

The bloc’s manufacturing output also dropped to 50.7 from 53.1 in March, its worst level in almost 2 years. Any figure below 50 shows a contraction and if the current trend persists, that may well be the case when figures are released next month.

Chris Williamson, S&P Global’s chief business economist, commented:

“Manufacturing output came to a near-standstill across the eurozone in April. Companies not only reported that problems with component shortages had been aggravated by the Ukraine war and new lockdowns in China, but that rising prices and growing uncertainty about the economic outlook were also hitting demand.”

The most recent PMI data also showed China’s manufacturing sector contracted in April for the second month in a row. It dropped to 47.4, which is its lowest level since February 2020 when the Covid-19 pandemic broke out. Manufacturing data from the USA also showed a second consecutive month of contraction to fall to 55.4.

The last time it dropped so low was September 2020 and 15% of respondents to an Institute for Supply Management survey said they were concerned about the ability of Asian partners to reliably deliver over coming months, up from 5% in March.

The dotcom crash played out over two years

The generally steady decline of growth stock valuations this year has, with some notable exceptions like Netflix’s 35% plunge last month, been gradual enough to largely avoid dramatic headlines involving the word ‘crash’.

But does that necessarily mean a different crash has not already started? One that perhaps more resembles the dotcom crash of 2000 which played out over two years? Having peaked at 5048.62 in early 2000, the Nasdaq had almost halved by the end of that year. But it didn’t bottom out until October 9, 2002, by which time it had fallen to 1114 for a drop of almost 80%.

Over two decades ago now the beginning of the tech, media and telecoms revolution that led to today’s giant companies had gotten underway. It drow the Nasdaq from 1000 points in July 1995 to over five times that by its pre-crash peak in early 2020. It’s a remarkably similar pattern to the period leading up to the end of 2021.

The parallels raise the question of whether we have several more months or a year or more of growth stock losses ahead of us. If we do that would mean we are only in the first leg of a drawn-out crash that could mirror that at the turn of the millennium.

There are also, however, important differences. We again have a lot of tech companies worth billions despite having never generated a profit. Some haven’t even generated any income. But the situation isn’t as extreme as it was in 2000 when the U.S. stock market was trading at an adjusted Cape ratio of 50. Last year Cape reached 39 in late November ahead of the start of the current downturn.

Today’s big tech companies are also a lot more established and profitable than those of 2000. Many also have a very wide moat consisting of dominant market positions and vast cash piles. And they are also a lot cheaper than they have been recently which could represent a buying opportunity that appeals to enough investors to stop valuations falling much further.

For example, the Allianz Technology Trust is down 32.6% since November. At 249.4p, the trust’s shares are 15% lower than the 294p value of its portfolio of companies. And the average price to earnings ratio of the companies that the trust holds is x26 times — much cheaper than the x46 it was at the end of 2020.

allianz technology

There could be more pain ahead over the next several months and it could well be enough to drag the major indices, especially those with a heavy weighting to growth stocks, into clear bear territory. We could now be in what will be known as the 2022 stock market crash in future years. But there are also enough reasons to suggest losses will not get close to the 80% decline of the Nasdaq that concluded two decades ago. The tech sector is now driven by companies that are far too profitable and are in far too powerful a market position for that to be likely this time around.

About the Author: Jonathan Adams

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