Since the start of 2023, the stock market has been fairly volatile. It’s not difficult to understand why. Inflation still plagues investors’ minds, while rising interest rates apply increasing pressure to debt-ridden businesses.
Yet despite all the up-and-down movement and pessimism, both the FTSE 100 and FTSE 250 are basically flat year-to-date. What’s more, the latest consensus forecast suggests that a renewed surge of growth could be on the horizon. Are we standing at the precipice of a new bull market? Let’s take a closer look.
The stock market versus inflation
The latest inflation report from the Office for National Statistics showed encouraging progress in the fight against rising prices. The consumer price index (CPI) for April came in at 8.7%. That’s still elevated, but it’s a significant improvement versus the 10.1% in March.
Almost all of this decline stems from falling energy costs, primarily driven by the drop in natural gas prices. Since around 40% of the national grid is powered by gas turbines, electricity and natural gas prices in the UK are highly correlated. And with the Economic Forecast Agency (EFA) predicting natural gas to drop by a further 10% by February 2024, energy bills are on track to get cheaper.
Forecasts should always be taken with a pinch of salt. But if accurate, this prediction bodes well for British consumers. And as household budgets loosen, businesses can more easily upsell products and services, paving the way for new growth.
With that in mind, it’s hardly surprising the EFA is also predicting the FTSE 100 to hit 8,573 points by January next year. That’s roughly a 14.6% increase from today’s levels. And it certainly suggests the stock market is primed to surge over the next six months.
What could go wrong?
While falling energy costs are helping alleviate the pressure on consumers, it’s not the only piece of the puzzle. Core inflation, which excludes energy, food, alcohol, and tobacco, actually rose from 6.2% to 6.8%. Meanwhile, the price of food and non-alcoholic beverages increased 19.1% in April versus a year ago.
The rising production costs, due to ongoing supply chain disruptions and Brexit, are offsetting the progress made in the energy sector. And while, in the long run, the economy and, in turn, the stock market will undoubtedly bounce back, we’re not out of the woods yet.
The International Monetary Fund has agreed with finance minister Jeremy Hunt that the UK won’t enter a recession in 2023. But that doesn’t necessarily mean the country will see growth either. And with the majority of worker salaries not being adjusted for inflation, household budgets will likely remain tight compared to 2021.
The bottom line
With all that in mind, will the stock market surge in 2023?
Personally, I’m quite optimistic. Even if growth remains tame in the short-term, further economic improvement is an encouraging sight that could renew investor optimism. And since the stock market is a forward-thinking machine, once a path to recovery becomes clear, the stock market has historically almost always started a new bull run.
