Why the US Market is Unlikely to Crash in 2022

Every day, we hear news about the performance of the US stock market, as if this is a magical crystal ball as to how the Australian market will unfold. Indeed, some investors wait, in anticipation, for the news, so they can make decisions about what to do in our market.

More recently, there has been speculation from retail investors that the US market will have the largest melt down in history, with many Australian investors concerned that our market will follow. So, will the US stock market crash and should investors take action to avoid getting caught out?

Does the Australian market follow the US market?

I agree that all major moves down in price on world markets, including Australia, will generally follow the US market, however, the timing of the falls may be different, and the severity of the fall will vary to some degree compared to the US market.

For example, the largest crash in US history started in September 1929 and completed in July 1932 with the market falling 90 per cent in price. The Australian market, on the other hand, started falling approximately seven months prior to the Dow Jones and fell around 50 per cent in price into a low in August 1931.

Over the past 100 years, there have been many examples where our market has been out of sync with the US market, which is quite common. This was evident with the move out of the COVID low whereby the Dow rose 102 per cent in 22 months into January this year while our market only rose 79 per cent over the same timeframe. I now believe there will be a changing of the guard and that our market will outperform the US market moving forward.

While it is possible that the S&P 500 could fall further, I doubt we will see a massive fall this year, as it has strong support around 3,505 points, which is a fall of 11 per cent from its current price. The same can be said for the Dow Jones, as it has good support around 27,500 points.

Realistically, if the masses are fearful of a significant fall, then it is only logical that they have already exited the market. Remember, crashes generally occur when optimism is high and investors are unaware, they don’t usually crash when there is pessimism and fear.

That said, regardless of what the US market does, investors would be wise to focus on the stocks they hold and those they want to buy rather than the index, especially an index in another country. If you are worried about a market meltdown, then set an exit strategy like a simple stop loss on the shares you own, so you avoid getting caught out in a market decline.

What were the best and worst performing sectors last week?

The best performing sectors included Consumer Staples up 0.30 per cent followed by Healthcare down 0.58 per cent and Financials down 1.17 per cent. The worst performing sectors included Materials down 10.26 per cent followed by Energy down 5.20 per cent and Utilities down 4.97 per cent.

The best performers in the S&P/ASX top 100 stocks included A2 Milk up 18.74 per cent after releasing a good report last week followed by Endeavor Group up 3.73 per cent and the Lottery Corporation up 2.05 per cent. The worst performing stocks included BHP Group down 14.18 per cent after going ex-dividend last week followed by Evolution Mining down 13.60 per cent and Fortescue Metals down 13.44 per cent.

What's next for the Australian stock market?

The All Ordinaries Index has continued to fall away as expected and confirmed its second consecutive week down with the index falling around 4.5 per cent over the past two weeks. As mentioned previously, my preference is for the market to fall for at least another one or two weeks before rising again. If it does continue to fall this week, I believe it will likely find support around 7,000 points. That said, it is possible the market will continue down for a few more weeks before finding support but I believe that is less likely.

Right now, investors would be wise to exit any stocks that trigger a sell and wait out the fall before buying again. Too many get caught out trying to buy a bargain only to suffer further falls as they have bought too early. Again, while I am expecting the market to fall in the short term, I believe it will find support soon and be overall bullish for the remainder of this year.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.