Have you heard something like “the stock market is going to crash in 2023”? Are you wondering if it’s time to sell your stocks? The stock market delivered poor returns in 2022. Will 2023 be the same? Though it’s impossible to fully predict the future, we can still take a closer look at all the discussion going on. In this blog, I’m going to share why some experts believe the stock market is going to tank in 2023 and why there may not be a stock market crash at all.
What is a market crash?
A market crash is when there is a significant and rapid decline in the stock market. Market crashes have occurred on average every 5.4 years since 1945. Some famous stock market crashes were in 1929, 1987, 1997, 2000, 2008, 2015, and 2018. We also experienced a downturn in 2020. Market crashes are a normal part of market cycles and historically, the stock market has always recovered from these crashes in the long term.
Top reasons why the stock market may crash in 2023
Some economists predict that there could be a mild recession around Spring 2023, not just in the U.S., but globally. The housing market continues to slow nationwide. Big tech layoffs and hiring freezes may prompt other industries to follow suit in preparation for a 2023 recession. The manufacturing sector is arguably already in a recession.
The Federal Reserve Chairman, Jerome Powell, continues to hint at modest interest rate rises over the next few quarters in order to slow inflation without destabilizing GDP. As of February 2023, the Federal Funds rate increased 0.25% points to a target range of 4.5% to 4.75%. Bottom line, there’s certainly a lot of uncertainty in 2023.
If inflation continues to be stubborn, the Federal Reserve may be forced to raise rates higher than expected, which can lead to a deeper recession.
Counter argument why the stock market will not crash in 2023
Some people believe that the stock market already “crashed” in 2022. It was down by about 25% at some point and this was mainly due to speculation of an impending recession. While 2023 may likely introduce a lot of volatility for stocks, some say that current valuations are relatively accurate. Fascinating new technologies, such as ChatGPT, are on the horizon to change the way corporations do business, forever. The shift towards a more digital economy may also provide opportunities for growth in certain sectors. Perhaps this tech evolution could mirror the tech boom of the 1990s.
We have been in a bear market since June 2022. However, the market is starting to improve. The S&P 500 is up over 6% in January 2023 alone. Many suggest a buy and hold strategy in these uncertain times.
How should investors navigate investing in 2023?
- Think long term: The stock market is highly volatile in the short term. It is important to stay invested in the stock market for at least 5-10 years. Stocks should be considered long-term investments. It’s not unusual for stocks to drop around 10-20% in the short term, so if you invest for the long term you can ride out the highs and lows. Historically, investors have rarely lost money investing in the S&P for a 20-year time period. Past results do not guarantee future returns but it does suggest that long-term investing generally does yield positive returns.
- Keep investing: You build wealth over time. Keep investing money regularly. The market is volatile, but if you keep investing small and frequently, it will likely be worth it in the long run. If you maintain your regular investments, even if the stocks fall, you will likely come out on top because at some point those stocks will rebound again.
- Be diversified as possible: The more diversified your investments are, the less likely it is that all of them will crash at the same time. We cannot control the market, but we can control our asset allocation and mix of investments.
- Don’t try to time the market: The stock market is difficult to predict, so don’t try to time your investments based on market conditions.
A certified financial advisor’s take on whether the stock market will crash in 2023
It’s good practice to always exercise a cautionary ear towards people who predict stock market crashes. Market timing doesn’t work and it can backfire. If you are always chasing the market then you will be constantly stressed.
Depending on your situation, stock market crashes may work to your advantage. If you’re shopping for jeans, do you prefer to buy them at a regular price or at a 20% discount? If you’re still saving for retirement, you can buy businesses (=stocks) at a bargain during stock market crashes.
Based on a study by Crandall, Pierce, & Company in 2018, stock market declines of -20% or greater recover in less than 2.5 years. This is based on data from 1945 to 2017. So if you’re investing for the long term, stock market crashes may appear as a short blip.
Will the stock market crash in 2023?
While no one can predict the future, we have given you some information to make your own prediction about whether the stock market will crash in 2023. If it does crash, remember not to make any rash decisions.