Will the stock market recover in 2023?

An updated forecast indicates the UK stock market might be primed for an impressive recovery in 2023. What should investors do to capitalise on this?

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The stock market has been on quite the rollercoaster ride these past 12 months. The 2022 correction saw many stocks, especially those in the technology industry, take a nosedive. And when things finally looked like they were starting to cool down, the banking sector threw a tantrum.

However, as dire as the situation seems today, 2023 could be the year of recovery everyone is waiting for. And that’s despite recent headlines featuring doomsday predictions.

Is the UK economy on track to bounce back?

Following the newly announced spring budget from the UK government, the Office for Budget Responsibility has made some pretty optimistic predictions.

For one thing, inflation is set to fall drastically to 6.9% by June and continue this downward trend to 2.9% by the end of this year. Meanwhile, GDP contraction for 2023 is now expected to be only 0.2%, instead of 1.4%. And this forecast indicates the economy will enter a new period of growth from 2024 onwards. If accurate, this means the UK is no longer at risk of falling into a recession with a new bull market just around the corner.

Needless to say, this is quite an encouraging sight. What’s more, the stock market is a forward-thinking machine. As such, share prices will likely rise ahead of the expected economic recovery if trends start moving in the right direction.

Taken with a pinch of salt

As wonderful as it would be to see the economy return to its former glory next year, this is far from guaranteed. Don’t forget this optimism is based on a forecast, which may never come to pass. Not to mention, there are conflicting opinions among experts.

For example, the International Monetary Fund is less optimistic, predicting that the UK economy will shrink by 0.6% in 2023. Meanwhile, the Bank of England believes economic growth won’t return until the first quarter of 2025!

Therefore, investors relying blindly on the opinion of one agency may be left disappointed. The reality likely lies somewhere in the middle of these predictions. Nevertheless, trends of recovery may be sufficient to restore investor confidence, sending the stock market back in the right direction.

How to profit from the stock market recovery

With volatility still plaguing stocks, investing today may not sound like the brightest idea. Yet history has shown countless times that strategically buying during these periods is a proven recipe for success. It’s also worth pointing out that stock market recoveries have almost always started when investors feared the worst had yet to come.

So while more volatility is likely ahead, what can investors do to capitalise on this situation without being exposed to excessive risk? The answer lies in pound-cost averaging. As simple as it sounds, drip-feeding money into a portfolio over time, rather than in a lump sum, provides enormous flexibility.

Suppose stock prices begin to climb? In that case, investors have tapped into this growth. But if valuations fall further, plenty of money is left over to buy high-quality shares at even better prices.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

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