With the UK (so far) managing to escape a recession in 2023, the stock market has fared better than expected this year. Neither the FTSE 100 nor the FTSE 250 have faced big declines.
Despite this, I think there’s still a real danger of a stock market crash in 2023. It’s hard to say exactly when though, so I’m making my preparations now to be ready.
In general, big stock market moves come in response to surprises. Positive ones send share prices higher and negative ones cause them to fall.
The main force moving equities in 2023 has been interest rates. These have been going higher (creating a headwind for share prices) but there’s optimism this might be ending soon.
Right now, investors seem to think rates won’t go much higher. This is partly due to the Consumer Price Index (CPI) – a measure of inflation – having fallen from 10.1% to 6.8% this year.
That’s got investors optimistic about the outlook for UK stocks. But I think there’s a good chance of a negative surprise here, which makes me wary of a stock market crash.
There are a couple of reasons I’m sceptical of the idea that interest rates aren’t going to rise after this month. Both have to do with inflation.
The first is prices are still rising faster than the Bank of England’s (BoE) 2% target level. Despite the fall in the CPI this year, inflation is still at over three times the central bank’s target.
In other words, inflation is still a significant issue in the UK, despite the progress over the last few months. As a result, I wouldn’t be too quick to rule out further interest rate increases.
Another is wages – according to the Office for National Statistics (ONS) regular pay grew by 7.8% and total pay by 8.5% between May and July. That’s no bad thing, but it does fuel inflation.
Higher wages boost the supply of money faster than the supply of goods and services, causing prices to rise. So I suspect the BoE might have to increase rates to counter this.
Preparing for a stock market crash
To me, the stock market looks precarious. But there are a few things I’m doing to make sure I’ll be ok even if things do turn volatile for a period of time.
First, I’m making sure the rest of my finances are in order. As long as I don’t have to sell any of my investments at low prices, I should be ok to wait out a downturn and emerge on the other side.
Second, I’m being careful with what I invest in. Sticking to shares in strong businesses at decent prices means I should do well over the long term, even if the near future is a challenge.
Third, I’m attempting to identify stocks I’d like to buy during a stock market sell off. Reinvesting dividends should give me a chance to take advantage of opportunities if prices fall sharply.
I think the chances of a stock market crash in 2023 are higher than people expect. So the best thing for me to do is to make sure I’m ready if prices drop sharply.
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Motley Fool UK 2023