Get ready for a stock market crash

I think a stock market crash in 2023 is a strong possibility. Interest rates, inflation, and employment numbers lead me to believe this.

As a result, I am preparing for a sharp decline in the share price. This includes identifying stocks that I believe are currently overpriced, but that I would like to buy at a lower price.

interest rate

Rising interest rates are the main reason 2022 is a down year for the stock market. Stock prices fell as bonds and cash began to offer better returns.

There were few rallies, though, as investors speculated that the central bank might decide to slow or even reverse interest rate hikes. When this did not happen, the stock fell again.

It seems to me that the market is still very optimistic about the future of interest rates. I think that central banks can’t accommodate it and it might cause a stock market crash.

Inflation

The reason for the central bank to raise interest rates in 2022 is high inflation. The Bank of England in the UK and the Federal Reserve in the US are aiming for 2% inflation.

Falling inflation on both sides of the Atlantic has been fueling investor optimism about interest rates. But I don’t think it’s time yet.

In the UK, the latest inflation reading came in at 10.1%. While that’s down from a high of 11%, it’s still a long way from the 2% target.

In addition, food and fuel prices show no signs of abating. As a result, I think interest rates will continue to rise, which could drive down stock prices.

unemployment

Macroeconomic data in the UK shows that the unemployment rate is low. And this could be a headwind for the inflation-reducing project.

Unless and until something happens in the job market, I think central banks will struggle to control rising prices, barring other global issues.

That makes me think that inflation will be difficult to bring down, which could cause interest rates to rise even more. That’s another reason to be prepared for a stock market crash.

Stocks to buy

For me, preparing for a stock market crash involves identifying stocks that I want to buy, but I’m not willing to buy at current prices. Two UK stocks stand out for me.

The first is Halma. The company is a collection of businesses focused on industrial safety, environmental monitoring, and life sciences.

Halma’s subsidiary occupies a dominant position in its niche market, making it difficult for competitors to disrupt. This gives the company a steady source of cash with scope for growth.

The second is Experience – credit bureaus that provide essential services to banks in debt. It also has low operating costs, which allows it to maintain a significant operating margin.

Experian’s business is protected by a large database that is almost impossible for competitors to copy. As a result, I think this is a good stock to own for the long term.

Both Halma and Experian are FTSE 100 stocks that I sold recently, as I thought there was better value available elsewhere. The high price remains a risk. But in the stock market crash, I probably think otherwise.