Is it possible that FTSE 100 shares might crash again in 2023? Well, it’s always possible, though I think it’s unlikely. But before I explain why, let me first suggest why we might actually get a see.
Stock market analysts like to measure all sorts of things. They check price-to-earnings (P/E) ratios, dividend yields, return on capital… they can produce enough numbers to confuse even the most mathematical among us.
But then, share prices often do exactly the opposite of what the analysts conclude. It’s really because no amount of numbers can counter investor sentiment.
Fear and uncertainty
Maybe people fear the war in Ukraine might escalate. Where’s the ratio that shows the risk of that? Energy costs are high. Is there a measure that relates share prices to our latest electricity bill?
Financial statistics and ratios simply don’t provide a good model of people. And that’s what markets is, it’s people.
I reckon financial measures can guide us in the long term, and that’s the key — long term. But the figures tend to lag the real world.
Slow responses
See an attractive forecast dividend yield? Broker forecasts are unlikely to change until after something has started going wrong.
What if China should start shipping weapons to Russia? That could make a lot of things go wrong for a lot of people.
I can summarise what I see as the biggest risk to FTSE 100 shares right now in just one word — uncertainty. While we face such extraordinary global uncertainty, there’s always a chance for a stock market crash.
Why no crash?
So, what makes me think there probably won’t be a crash? And what will I do if I’m wrong?
It’s actually back to those financial measures again. But I try to see what trends I think they suggest, and what it might mean for the long term — not for the next year or so.
At the moment, the FTSE 100 P/E ratio stands around 14. That’s near the low end of its typical long-term average range. At the very least, it suggests to me that UK shares aren’t overvalued. And with earnings across many sectors growing, I think it makes them look cheap.
Cash
UK companies are also generating strong cash flow. The Footsie hit a record year for dividends in 2018. And it’s looking like 2023 might beat it. These are very early days, but it’s one more thing that makes me think a big share sell-off is unlikely.
A good number of our top companies are engaged in share buybacks right now too. So there’s plenty of surplus capital around.
What if?
What if I’m wrong, and there’s a new stock market crash this year? That’s where long-term thinking comes in again. As long as shares look good value based on long-term expectations, I’m happy to keep buying and holding.
And if share prices should fall, that means I could buy more shares for the same money, and build a bigger stash for the next decade and more.
