The 2022 Stock Market Crash: How It Happened And What To Do Next (w/ @The Plain Bagel )

It's fair to say 2022 has not been great for stock market investors. At the time of recording, the S&P 500 is now down about 20% year-to-date, with the Nasdaq, the exchange hosting mostly tech companies, down 28%. With all that's going on in the world right now— from wars, the most serious conflict seen in Europe since the Second World War, interest rate hikes, the Federal Reserve raised interest rates again today, to supply chain issues—China's continued zero-COVID policy is impacting the broader global supply chain. It's got a lot of investors worried that the worst is yet to come.

So in this video, let's hone in on 2022's big market downturn and discuss the key reasons that are causing it and what we should be doing about it.

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Now, in my book, there are three main concerns that are currently contributing to the market downturn we've seen in 2022. Of course, you can never know this for certain, as a market downturn literally just means that investors across the board are selling more than they're buying—that's it. But I think in this instance, it's quite likely that there are three events that can take the blame for the market's poor performance.

The first is Russia's invasion of Ukraine. The Ukrainian capital, Kiev, gunfire, and explosions have been heard here and in the second city of Kharkiv after Vladimir Putin authorized the invasion of Ukraine. It's having a ripple effect across the globe. Putin chose this war, and now he and his country will bear the consequences. While this is a very serious issue, you might still ask how does that affect the stock market all the way over in the United States?

Well, the main reason is that on top of the military war, there's also an economic war. The president unveiled sweeping new sanctions against Russia, cutting off Russian banks and freezing trillions of dollars of assets. The U.S. has imposed many economic sanctions on Russia; Russia have threatened to stop exporting. Beyond that, there's also been an increased social pressure for U.S. businesses to stop trading in Russia.

Airbnb, Amazon, Google, AMD, American Express, Apple, Costco, DHL, GM, Intel, Mastercard, Meta, Nvidia, Netflix, Oracle, PayPal, Snapchat, Starbucks, Visa, eBay— all U.S. listed companies that have withdrawn or are withdrawing from doing business in Russia. While that further puts the squeeze on Russia's economy, we have to remember it also hurts these U.S. businesses, as they're abandoning a chunk of their international revenue.

Netflix, for example, just lost 700,000 paid subscriptions because they suspended their service in Russia. That definitely affects their bottom line. So that's reason number one.

Then reason number two is, of course, the global supply chain and, more specifically, China. We actually have massive news coming out of China that could have serious implications for the U.S. Supply chains still face huge challenges. 87 of China's largest 100 cities are affected by the zero-COVID lockdown. The Shanghai lockdown has snarled up the world's busiest container port, Shanghai. If you will, like the harpy, the global supply chain is so intricately woven that a small glitch can quickly amplify and disrupt its flow.

Because China accounts for about 30% of the world's manufacturing output, there's been a lot of shortages for a lot of things. For example, one of the most written about supply chain shortages that has been raging for well over a year now has been the shortage of semiconductor chips. For those of you living under a rock, currently there is a massive global shortage of semiconductors. A new car is just one of many things that are more expensive—CPUs, graphics cards, even fridges. We don't have these chips; we're in trouble.

Well, most of the world's chips are manufactured in China. So while lockdowns persist in China, that naturally leads to lower chip exports and thus less finished product from the chip-reliant companies. Apple is reportedly cutting its iPhone 13 output. Less product to sell naturally then means less sales, which then reduces profits. The shortage could cost around $60 billion and frustrates investors right now. Unfortunately, in China, there's less port activity than in the depths of the 2020 lockdown. So make no mistake; the lower output of China right now is certainly impacting many industries and has a big flow-on effect into the stock markets.

Plus, it also causes scarcity, which is then a driver for inflation. Many Americans are not making enough money to support their families. The price of almost everything is rising faster than for a generation. I want every American to know that I'm taking inflation very seriously. Americans are increasingly turning to credit cards to make ends meet, even though rising interest rates make that debt more expensive.

As we've seen, the scarcity of goods, as well as the loose monetary policy from the Federal Reserve, has led to very high inflation in the United States. This has now forced Jerome Powell to start raising interest rates, which isn't good for businesses, as it makes borrowing more expensive. Thus, if a business has a lot of debt that's getting rolled over, all of a sudden, a lot more of their juicy profit is actually getting absorbed by the increased cost of holding that debt.

This naturally puts a lot more stress on businesses. When rates were at zero, businesses could just throw the kitchen sink at growth and expansion. But now those expansion costs are going to be that much higher. A lot of businesses might reign in their growth plans, which a lot of the time is a primary reason why investors back them in the first place.

The reason the market has actually been a little bit more worried about rate hikes over the past week or two is because recently, Jerome Powell said in an interview that he's not scared of getting more aggressive with the rate hikes to make sure they actually do get inflation back down to the 2% annual rate. What we need to see is clear and convincing evidence that inflation pressures are abating and that inflation is coming down.

So what we're going to be looking at is what's happening with financial conditions and what's happening with the economy—really, with what effects are our changes in policy having on the economy? Are we starting to see really clear and convincing evidence that inflation is coming down? If that involves moving past broadly understood levels of neutral, we won't hesitate at all to do that. We won't. We will go until we feel like we're at a place where we can say yes, financial conditions are in an appropriate place, we see inflation coming down, and there won't be any hesitation about that.

So no doubt the economic environment in 2022 is getting tougher and tougher from multiple angles, and investors are seeing that happen and are getting worried. Plus, as interest rates rise, remember new government bonds become more enticing. So a lot of institutional money in the stock market will naturally filter back out into the bond market as interest rates rise. So there's that dynamic as well, which puts even more pressure on the stock market.

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But having said all that, what do we do about it? Well, to try and get a little more clarity in this rather stressful time, I reached out to investment analyst and portfolio manager Richard Coffin, who you guys will no doubt recognize from The Plain Bagel. And as always, he had some very soothing advice for us value investors.

When it comes to declines like this, it's really just about taking that long-term perspective. In the short term, markets go all over the place. Shortly after the pandemic, when markets were crashing by large amounts every single day for many consecutive days in a row, a year later, they were essentially back to where they were. So it doesn't make a whole lot of sense to try and take advantage of that confusing landscape, especially if you're someone who's just investing for those everyday, you know, goals and those objectives like most people are.

So really, it's just, you know, switching to that long-term perspective of a value investor. And one approach that I always like to reiterate is the idea of being a business owner—someone who owns a business. Most people can understand the general business model: Every day they go in, they sell their shoes or whatever it is they sell there, and they earn a profit.

Imagine one day someone runs in frantic, saying that the markets are down, every business is shutting down, and your business is doing terribly too; you should liquidate it while you can. If that business owner is behind the counter counting the dollar bills in their cash register, they're probably not all that concerned about this crazed person running and yelling about the markets. And that's kind of how stocks work sometimes. You know, at the end of the day, you own a business. It doesn't really matter what other people are yelling at you or what the price of that business is.

If you know that that business is doing well, that it's generating cash flows that will support its operations moving forward, so long as you paid a good price—because price does matter. It usually only matters in terms of what you paid for it. What you entered it into—the price might go lower down into the future. But if you're happy with what you paid and what you're getting for what you paid, then there's really no reason to stress on the day-to-day fluctuations you see.

So while the media might be screaming that the world is doomed and markets are going to keep declining, for long-term investors, the challenge at a time like this is very much about staying rational. Remember why you bought in; go back to the business fundamentals, go back to the cash flows, and don't worry about what the next guy is willing to buy the stock for. It's all about staying rational and not making any snap decisions that you might regret in the long run.

It's not a good idea to sell just because markets are down. It's not to say that there's never a situation where markets are down and you don't sell, because I don't know what people have invested in. There's a chance you hold something that maybe you shouldn't. But let's assume that you did a good job; you feel confident in your research. One of the biggest don'ts is obviously to sell when everyone else is selling. It's the worst time to do that because you have everyone applying low valuations to the stocks that you're trying to put into the market.

It's a bad time to sell when everyone else is scared. Most of the time, over the long term, valuations normalize. To do so when things are at the compressed level doesn't make a whole lot of sense. So while it may seem logical to get out before things potentially get worse, oftentimes selling out when everyone else is selling is the worst time to exit.

The phrase is buy low and sell high, but what's crazy is that in reality, most people tend to do the opposite. As Richard was describing before, if you hold quality businesses that aren't gambles, then in fact, you probably don't have all that much to fear in the long term, even if the markets are currently heading south.

But of course, fear is still a very powerful emotion that a lot of people feel during times like this. But there's one trick above all others that helps you stay in control of your emotions during a market downturn. The big thing is that you don't need the money. Let's say that you took the money that you need for a down payment for the next three years and you invested that into the market—mentally, you're going to be pretty stressed when you see that amount that you need that's coming up soon fluctuate by large amounts.

And it's going to make it a lot harder to stick to the roadmap that you've laid out. On top of that, three years isn't a long time or isn't really enough time in some cases to see your thesis, if you will, about certain stocks play out. So it's kind of this rule of thumb that if you need the money within the next three years, you probably shouldn't be putting it right into the stock market. There's just too much fluctuation in the short term, and three years is still kind of the short term. You know it's very hard to predict where stocks will be in three years' time.

So that's kind of another step: being aware of your risk tolerance and investing your money accordingly. Warren Buffett says don't hold a company for 10 minutes unless you're willing to hold it for 10 years. Long-term investing is all about setting aside money you don't need for 10 years and investing it in companies that you think will be worth more in 10 years.

So there are some practical bits of advice from a professional money manager as to how to navigate market downturns. One more point that Richard raised is that it's always okay to ask for help. Stock investing and just investing in general is half emotional management and half analysis. It depends on the type of person you are and what you want from investing. You know, if you're someone who wants to understand the companies they hold and wants to do that research, all the power to you.

And there are some people who, you know, just aren't destined to be stock pickers, and there's no issue with that. You want to make sure that if you're investing your money, you're doing so in a smart way. If you don't feel confident in your emotional management or what you know yet about stock picking, then there are other solutions out there—whether it be a portfolio manager with a fiduciary duty, whether it be a fee-only financial planner, or whether it be a more passive approach, like just a basket of ETFs that is broad and diversified. That is an approach as well that's kind of more beginner-friendly.

Even though I am a professional, I think people should be able to do their own research and stock pick and stuff like that. It's just if you need help, reach out for help.

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You know, no one should be left feeling very stressed and losing sleep, thinking that everything's on their shoulders. There are options out there. People are really nervous about downtrends like this.

So there you go, guys. That is what's going on in the markets at the moment. I think that was a very good note to end on from Richard. You know, it can be a crazy time to stay rational, make sure you go back to your fundamentals. But if you do feel like you're overwhelmed or you can't handle the volatility, make sure you get a professional to help you out. Very big thanks to Richard for his help with making this video possible.

Be sure to check out his YouTube channel, The Plain Bagel. Of course, subscribe to his channel; I'm sure you guys will like it a lot. If you liked this video, make sure you leave a like and subscribe for more investing-related content. If you want links to all the other stuff that I do, links are down in the description below. But guys, apart from that, thank you very much for watching, and I'll see you all in the next video.