2023 has certainly started strongly for the stock market. In London, the FTSE 100 is up 4.7% so far this year while the smaller FTSE 250 index has added 3.9%. Those might not sound like massive gains, but for a two-month period I think they are impressive. After all, in the past 12 months, the main index has only grown 6.4% while its little sibling has lost 4.4%.
Across the pond, 2023 has also got off to a great start, on some fronts at least. The tech-heavy Nasdaq has fallen 17.3% in a year — but it is up 9.6% so far in 2023.
By contrast, the Dow Jones index is down 3.6% over the past 12 months, and has lost 1.4% since the beginning of 2023.
Aside from the Dow, those are some fairly promising numbers just a couple of months into the year. Can they keep going – and what does that mean for my portfolio?
Positive momentum
Nobody knows what will happen next in the stock market. So recent performance is never necessarily a sign of what might come next.
But I see some reasons to be hopeful that 2023 can continue strongly. Tech firms like Tesla and Meta have rebounded strongly this year. If they continue to win favour with investors, that could help the Nasdaq to keep doing well.
Potential buyers have reportedly been sniffing around UK shares that they think offer good value. Looking at the valuation of some right now, they do look attractive to me. Legal & General, for example, trades on a price-to-earnings ratio of under 8, despite making several billion pounds in post-tax profits last year and having a progressive dividend policy alongside a 7.2% yield. Attractive valuations can bring in more investors, helping push up stock market valuations.
Uncertain recovery
But momentum can fizzle out if it lacks underlying support. Looking at the current corporate landscape of the London exchange, I have my doubts about the pace and scale of economic recovery.
The recent round of results from banks such as Barclays and Lloyds provided indicators of ongoing weakness in parts of the economy. Housebuilding shares have been wobbling due to concerns about the property market. Inflation continues to add costs for producers, while stretched consumer budgets continue to pose a risk to demand. Yet such concerns are not limited to the UK, as shown by the Dow’s lacklustre start to the year.
There are drivers for further recovery in 2023, such as the global economy opening up almost completely for the first time since before the pandemic. But I also see considerable ongoing risks.
My stock market plan
Based on that, I would be surprised if the strong positive momentum seen in the UK so far in 2023 can continue at the same level across the whole year. It might happen, but I am certainly not counting on it.
That is fine, as I am not buying an index overall. Instead, I am looking for great companies with attractive valuations I can add to my portfolio. That is my plan for 2023, no matter what happens in the wider stock market.
