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What could cause a stock market crash in 2023?

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Though shares and bond prices plunged worldwide in 2022, the UK stock market dodged this storm. Indeed, the FTSE 100 index is up 5.2% over the past 12 months. It’s also gained almost 1,050 points (+15.7%) since its 13 October low. But what might send UK shares plunging this year? Read on for my thoughts, and to find out why I’ll continue, adding to my portfolio, regardless!

What triggers stock market crashes?

In my experience (36 years, including the crashes of 1987, 2000-03, 2007-09 and 2020), stock market crashes tend to be triggered by three types of events.

First is when the end of a long ‘bull run’ of rising prices creates unsustainably high valuations. This bubble then bursts, triggering steep falls. For example, I repeatedly warned in late 2021 that financial assets were in an ‘everything bubble’ that was bound to collapse painfully.

Second, an economic recession falls over a sustained period. Currently, pundits predict recessions of varying severity in the UK, Europe and the US in 2023.

Third, there’s some form of external shock — such as a major conflict or other outlying event — that prompts panic selling, sending stock markets sliding. In 2022, Russia’s invasion of Ukraine and the US Federal Reserve steeply raising interest rates fell into this category.

What are the main risks in 2023?

I’m a mathematician, not a magician and don’t have a crystal ball to predict the future. That said, during the holiday lull, I wrote a list of threats that could harm corporate earnings and company share prices. These are my highlights from that very long list:

  1. Inflation may stay higher for longer, with slower wage growth undermining disposable incomes.
  2. This may lead to higher interest rates for longer, making mortgages pricier and undermining property values.
  3. The economy could contract for several quarters in a row, pushing up UK unemployment.
  4. With consumer confidence at record lows, discretionary spending is likely to fall.
  5. With GDP growth slowing and recession looming, this could hit UK retail sales, business investment and foreign direct investment.
  6. Rising social inequality, lower worker productivity and an ageing population could harm company earnings.
  7. Climate change and political polarisation present big headaches for governments.
  8. Slower or negative loan growth and higher bad debts could hammer big banks’ earnings.

Also, there’s a whole host of other hidden vulnerabilities that might trigger forced selling, leading to extreme price moves and dislocations. Indeed, the International Monetary Fund has warned that the worst is yet to come for the global economy and financial markets.

I don’t expect the FTSE 100 to crash

Now for some good news. Stock markets always ‘climb a wall of worry’, so there’s really little new here. Also, about three-quarters of FTSE 100 company earnings come from overseas, so it’s more of an international index than a homegrown one. Thus, I’m not expecting a UK stock market crash (where the market falls 20%+ from a previous high) in 2023. Phew.

To sum up, if 2021 was the year of fantasy valuations, then 2022 saw a sea change in global financial markets. Put another way, if 2021 was the top of the mountain, then I expect 2022 to be the bottom. Hence, as is so often the case, 2022-23 may well offer big bargains for value investors like me hunting cheap shares!

The post What could cause a stock market crash in 2023? appeared first on The Motley Fool UK.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.