The UK stock market has surged in recent weeks, despite a less than favourable macroeconomic backdrop.
But some investors are forecasting stock markets to crash in 2023. So let’s take a closer look at why that might be and whether the prospect is truly realistic?
Forecasting a crash
Essentially, no one can predict when the stock market is going to crash with any accuracy. Many investors have bet on the market collapsing and have got it wrong.
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But one such individual forecasting a desperately poor 2023 is legendary British investor Jeremy Grantham. The co-founder of GMO — an investment management firm established in 1977 — is forecasting that the S&P 500 will fall 16.7% by year’s end, reflecting a 20% real decline for 2023.
While he sees this as the most likely outcome, Grantham poses a worst case. “If something does break and the world falls into a severe recession, the market could fall a stomach-turning 50% from here,” he wrote.
But this is just the S&P 500. It doesn’t necessarily mean the FTSE 100 will follow.
What are the conditions?
Stock market crashes can happen for several reasons. In the past, we’ve seen crashes after housing market slumps, an economic recession, and falling corporate profits.
Grantham argues that the current macroeconomic environment is less than conducive to growth, and adds that S&P valuations are still above average.
He also argues that while the “extreme froth has been wiped off the market, valuations are still nowhere near their long-term averages.”
As the investor made his comments in relation to the main US index, I’d suggest that the FTSE 100 doesn’t really have the same problem — valuations don’t look too expensive to me.
Why it might not happen
Grantham also notes there are several things that could prevent the market tanking in 2023. These are “subsiding inflation, the ongoing strength of the labor market, and the reopening of the Chinese economy – speak for the possibility of a pause or delay in the bear market.“
Also, as already highlighted, the legendary investor’s forecasts are focused on the US market. While we often say when the US sneezes the world catches a cold, that doesn’t always apply to stock markets. After all, many UK-listed stocks are already pretty cheap.
Is there really room for a crash in the UK? It’s already been something of a forgotten market on the global stage. In some respects, investors see it as a separate asset class.
What can I do?
Concerns about a tanking US stock market doesn’t influence my investing strategy hugely. I have limited exposure to the US market, partially due to the weakness of the pound, partially because I think I can find better value in the UK.
As such, I don’t feel like I need to prepare for a stock market crash this year.
But I must note that market fluctuations are inevitable. As such, I could employ a pound-cost averaging strategy. This involves drip-feeding my money into equities over time.
