The stock market has shown considerable strength so far in 2023 after last year’s poor performance. In the UK and US, stocks continue to climb in defiance of some of the gloomier forecasts put forward by bearish analysts.
The FTSE 100 index is on the verge of reaching 8,000 points for the first time. Across the pond, the S&P 500 benchmark is on the cusp of a new bull market after rising 8% since the beginning of January.
Here are three reasons share prices could keep rising on both sides of the Atlantic this year.
1. Inflation is slowing
High inflation rates have been a major headwind for stocks. Rising prices bring uncertainty to the markets due to the corrosive effects on companies’ profitability and margins. This, in turn, knocks investor confidence.
However, there are signs that restrictive monetary policy is beginning to take effect. Both the Bank of England and the Federal Reserve have embarked on a series of interest rate hikes. The UK’s base rate is currently 4% and the federal funds rate is higher at 4.5-4.75%.
Inflation rates in both countries are cooling. In the UK, inflation’s down to a still-large 10.1%, but from the 41-year high of 11.1% posted last year. Stateside, it’s falling quicker. January’s CPI data revealed a 6.4% inflation rate, down from last year’s 9.1% high.
If inflation continues to fall, central banks have more leeway to relax monetary tightening. That’s traditionally viewed as bullish for the stock market.
2. Avoiding recessions
There’s an old adage often trotted out by investment analysts: “The stock market is not the economy.”
While this is true, there’s no denying the two are intrinsically linked. Anaemic economic growth, high unemployment and recessions can hurt equity valuations. In addition, catalysts for macroeconomic expansion such as innovation and technological breakthroughs are drivers of share price appreciation too.
Resilient jobs data in the US suggests the American economy may avert a recession this year. The IMF is more pessimistic on the outlook for the UK, but considering FTSE 100 shares derive around 82% of their revenues from overseas markets, the index is dependent on economic growth abroad more than it is at home.
Although there’s still a great deal of uncertainty, if recessions can be avoided, stocks could benefit.
3. China’s reopening
One final factor that might lift share prices this year is China’s economic reopening. The ‘zero Covid’ policies pursued by the Chinese government over the past couple of years have had a huge impact on supply chains and global growth.
As the world’s second-largest economy, China’s a critical player in determining how the stock market performs. Expected stimulus measures and a relaxation of strict public health measures could provide positive momentum for equities.
A note on risks
Although bullish factors could continue to drive stock market growth, caution is required. There are no guarantees with investing, and circumstances can change quickly.
Inflation rates could remain stubbornly high, economies may enter recession, and geopolitical tensions between the West and China could negate any positive effects from the Chinese reopening.
I’ll continue to invest in stocks this year, but I’m keeping enough spare cash on hand to remain nimble in the face of potential surprises.
