Global financial markets are in the midst of a major meltdown. Stocks, natural resources, and crypto have experienced one of the largest sustained crashes in recent memory. So is it time to worry? The short answer is “no” but here’s why.

Historical Evidence — The March 2020 Crash

The March 2020 global financial market crash was caused by a combination of uncertainty around the onset of the global pandemic. In March 2020, the Dow had to hit the emergency breaker — which halted trading — three times in the span of just two weeks.

The 2022 crash has been a bit different. Instead of a swift crash, the trend has been a sustained and steady decline. While the 2022 crash is equally if not more concerning, we have to look at how the market has responded to similar events in the past.

One of the biggest reasons not to panic is simply to look at the V-shape recovery of 2020 when stocks and crypto had record-setting rallies just months after the March crash.

Zooming out further, the long-term trajectory of most financial asset classes has always been upward.

The Worst Has Passed… Well Maybe

One possibility is that the market bubble has already burst. While that isn’t a reason for celebration, the reality is that a lot of the selling pressure appears to be alleviated. People who are selling now are likely selling at high losses, which defeats market rationale.

Especially with tech stocks, the negative year-to-date returns have already reached unprecedented levels. Although the fact that previous gains have been wiped out doesn’t ensure a market rally is happening soon, the time to worry about an imminent crash has well passed.

For most passively managed portfolios, it’s not an ideal time to start panicking.

Still Time for a Correction

There are macroeconomic conditions that point towards the unlikelihood of a recession, at least for the U.S. First, it appears that annualized inflation in the U.S. peaked in March 2022. It’s estimated that inflation for April will be only around 8.1%, compared to 8.5% for March.

Second, U.S. GDP growth is projected to be 3.0% in 2022. That’s slower than the 5.6% growth of 2021 but still well above the pre-Covid trend. GDP growth during a true recession would be close to 0% or even net negative.

So What’s Next?

Only time will tell what’s in store for financial markets. 2022 has been a rough year so far. The combination of inflation, declining investment returns, and supply chain shortages have helped paint a doomsday scenario.

The reality is that a major recovery isn’t a guarantee. However, there are signs that the worst will soon be behind us.