With the fears of a recession on the rise, investors are becoming agitated by the uncertainty surrounding a potential stock market crash in 2023. And these fears may well be justified.
Last month, legendary British investor Jeremy Grantham released his 2023 outlook letter. And it did not look pretty. For those who are unaware, Grantham co-founded GMO, an investment management firm established in 1977. Since then, its assets under management have grown exponentially, reaching an estimated $65bn.
In his letter, he listed a myriad of factors that potentially point to a 16.7% decline in the S&P 500 by the end of the year. And that was his most optimistic outlook. In the worst-case scenario, he predicts the stock market will crash by as much as 50%!
Does this mean investors should start selling everything and run for the hills? No. Let’s take a closer look at what’s going on.
Investigating the potential 2023 stock market crash
In the letter, Grantham outlined the main catalysts for a potential looming decline. And it’s nothing that hasn’t been talked about before: Covid-19, Ukraine, supply chain disruptions, inflation, and interest rates. But what makes him so concerned about a stock market crash is that the current bear market is actually quite unusual.
Throughout history, every bear market has been triggered by different factors. But they share some common characteristics:
- A drop in corporate profits
- A housing market slump
- An economic recession
And yet, none of these has really happened. Looking at some of the latest earnings reports from S&P 500 and even FTSE 100 companies, profits are, on average, up, with some firms even posting record highs. Meanwhile, the housing sector, while showing some signs of weakness, is being fairly resilient. And as for a recession, there has yet to be one.
That’s why Grantham believes a bubble still exists, and a stock market crash could be just around the corner.
What now?
As compelling as Grantham’s arguments are, there is another potential explanation. The central banks’ objective of achieving a “soft landing” is working. That may be naïve thinking, but even Grantham admits there continue to be exciting investment opportunities, even with a potential stock market crash just around the corner.
So what should investors do? Trying to time the market is a loser’s game that often results in investors missing out on substantial wealth. Instead, the best practice, in my experience, is to employ pound-cost averaging. Rather than throwing all available capital into equities in one go, drip-feed it over time.
Using this simple buying strategy, investors can still profit from today’s low prices if the stock market continues to rally. At the same time, if Grantham’s prediction comes true, there will still be plenty of money at hand to capitalise on even cheaper valuations later in the year.
Don’t forget the stock market has a great track record of recovery, driven by high-quality businesses. So while the short-term remains shrouded in uncertainty, the long-term wealth-building potential remains crystal clear.
