It is impossible to know the future -- or at least the details of it -- with complete certainty. No one can know for sure whether there will be a market downturn tomorrow, next week, or next year. But that doesn't mean there aren't clues that can point us to a reasonable answer to this question: How likely is it that we will experience a market crash in the next 12 months?
Let's look at several reasons why it's more probable than you think -- and more importantly, what's the best way to handle it if it does happen.
Two reasons there may be a market crash in 2022
A market crash is defined as a 20% drop from an index's most recent high. Since 1945, these events have occurred roughly once every 5.4 years. Given that we experienced a downturn in 2020, this historical trend would suggest we are off the hook -- at least as far as downturns are concerned -- for a little while longer.
Image source: Getty Images.
But hear me out. First, there's the omicron variant of COVID-19, which already accounts for a large percentage of new cases of the disease in the U.S. Other countries are also seeing surges in COVID-19 cases, leading to new restrictions on large private gatherings and some public events that typically attract large crowds in Germany, for example. While this isn't a guarantee, omicron could mean freshly issued, widespread government-imposed lockdowns eventually sweep much of the globe, which could harm the economy -- and the stock market.
Second, the market looks richly valued right now. The Shiller cyclically adjusted price-to-earnings (CAPE) ratio is a decent measure of the broader market's valuation. It currently stands at nearly 40. The last time it was higher than this was at the dawn of the dot-com bubble burst. Given how frothy the market looks, a crash will undoubtedly happen eventually. The current trajectory of the pandemic raises the likelihood that it will happen next year.
But even if this prediction comes true, investors shouldn't worry too much. Bear markets are always followed by bull markets -- after all, the S&P 500 has more than doubled since it bottomed out in late March 2020. Buying shares of great companies on the dip is always a good move amid a downturn. Here's one great stock to invest in if there is a market crash in 2022, or even there isn't one.
This company is firing on all cylinders
Few pharma companies have grabbed more headlines than Pfizer (PFE 2.40%) in the past year. The reason for that is obvious: Along with its partner BioNTech, the drugmaker developed and marketed the leading COVID-19 vaccine on the market, Comirnaty. This vaccine is on track to rack up $36 billion in sales in its first year on the market. That's practically unheard of -- and what helped Pfizer's stock beat the market this year.
With the omicron variant now in full swing, the company will continue to benefit from this tailwind thanks to Cominarty and its recently approved COVID-19 therapy, Paxlovid. In a late-stage study, this medicine reduced the risk of hospitalizations and death in COVID-19 patients by 89% compared to placebo. And Pfizer's lineup beyond COVID-19 looks excellent, too.
The company boasts several blockbuster drugs, including anticoagulant Eliquis. In the first nine months of the year, sales of Eliquis came in at $4.5 billion, 21% higher than the year-ago period. Other products that are meaningfully contributing to Pfizer's top line include cancer medicines Xtandi, Ibrance, and Inlyta. The drugmaker's biosimilar business is performing well too -- sales from this segment soared by 66% year over year to $1.7 billion in the first nine months of 2021.
That's before we turn to Pfizer's pipeline, featuring dozens of ongoing clinical trials, including 29 phase 3 studies. The company's current lineup will continue to expand -- thereby adding new sources of revenue and leading to continuous top-line growth.
On top of that, Pfizer's shares look fairly valued -- trading at 9.6 times next year's earnings; the industry's average forward price-to-earnings ratio was 13.5 as of Dec. 1. For a company that is currently performing as well as Pfizer is, that's almost too good to be true.
Here's just one more reason to consider Pfizer: The drugmaker currently offers a dividend yield of 2.71%, compared to the S&P 500's yield of 1.30%. Pfizer also boasts a conservative cash payout ratio of 29.64% -- giving it plenty of room for future dividend increases. That makes the healthcare giant an excellent option for dividend-seeking investors, in addition to the growth potential it offers at a great valuation.
If Pfizer's strong stock market performance is interrupted due to a downturn next year, that will only make the company's shares cheaper. But regardless of what happens to equity markets in the next 12 months, Pfizer is an excellent pharma stock to buy and hold for many years to come.
