Will the stock market crash in 2023?

Global stock markets have produced poor results in 2022. US stocks have performed exceptionally well. Excluding dividends, the S&P 500 declined 19.4%, and in Nasdaq 100 worse, it fell 33%. UK stocks are proving to be better investments. At FTSE 100 eked out 0.9% gain, even though the middle of the cover FTSE 250 index struggled, fell 19.7%.

However, some bearish analysts insist that we haven’t seen capitulation yet – often seen as the last stage of bear market woes. British investor Jeremy Grantham has predicted the S&P 500 could drop 50% in a worst-case scenario.

So, how likely is the stock market crash of 2023? Here I am.

The case of the bear

Rising interest rates, stubborn inflation, and a slowing economy. There seems to be no end to the list of reasons to be bearish.

American investors can point to a 10-year price-to-earnings ratio of 29.3 for the S&P 500 – this is 45% above the index’s modern-day average. Using this benchmark alone, U.S. stocks look expensive despite falling sharply.

Closer to home, IMF forecasts suggest a bleak outlook for UK stocks. While many advanced economies received a slight upgrade in growth prospects, Britain languishes below IMF forecasts – behind Germany and even sanctions-hit Russia. It is the only G7 country to be in recession this year.

The outlook for European stocks is overshadowed by the war in Ukraine. In addition, Spain’s January inflation data was hotter than expected. Consumer prices advanced 5.8% year-on-year, up from 5.5% the previous month. This could indicate that the ECB may need to be hawkish if similar numbers emerge in the eurozone.

Bull case

On the other hand, stocks often look forward. Stock market prices can be seen as an aggregate of investors’ opinions about the company’s future performance. At a time when some investors are taking note of the current state of the economy, Mr. Market has his eye on the future.

Stock prices have historically experienced long-term uptrends as innovation and other drivers of economic growth boost corporate profits. Take an example, the AI ​​revolution is also underway. OpenAI’s tool, ChatGPT, has attracted attention.

Indeed, Microsoft recently announced a $10bn investment in startups. Who knows what the technological developments of 2023 may bring, but a major breakthrough could be good news for equities.

What’s more, it’s easy to become pessimistic about the future. Inflation rates may cool, economic growth may beat expectations, and the war in Ukraine may end sooner than anticipated. Any of these events would be a tailwind for stock market growth.

How I invested in the stock market this year

I expect volatility in 2023. Trying to predict a stock market crash is arguably a fool’s game, but it reminds me of an old adage: time in the market beats time in the market.

I will still invest in stocks this year, albeit cautiously. By diversifying my holdings across sectors and keeping enough cash to buy big bucks, I hope to weather the heavy volatility.

Besides, I invest for the long term. I’m more concerned about where stocks will be in 2033 than 2023, so unless we’re headed for another great depression, I think the long-term outlook remains bright.