Will there be a stock-market crash before 2023 is out? On 27 October, the odds were rising on a market meltdown, but both sentiment and stock prices have surged in just one week.
What is a crash?
What do I mean by a crash? Generally, a correction is defined as a fall of at least 10% from a previous market high, while a crash is defined as a collapse of 20%+ from an earlier peak.
Also, when discussing market meltdowns, one market almost always leads the way and calls the shots: large-cap US stocks. As one old City saying goes: “When New York sneezes, London catches a cold.”
The only game in town
Currently, the US stock market accounts for around 63% of total global stock-market capitalisation. In other words, a bet on global trackers is overwhelmingly a bet on corporate America. In 2010, this weighting towards the US was roughly 42%.
Another problem is that just a few stocks drive the US market. The 10 largest S&P 500 companies account for 34% of the index’s total value. The last time market concentration was this high was just before the dotcom bust of 2000-03.
Thus, global stock markets are being steered by US mega-cap (mostly tech) firms. Of course, this may be a good thing, given the power, success and profitability of these global leaders.
Markets bounce back
After a strong start to 2023 for stocks, it seemed like someone flicked the ‘OFF’ switch on 31 July. From then until 27 October, the S&P 500 dropped 10.3%. That weekend, newswires rushed to report this market correction and warn of the rising risks of a crash.
A whole lot changed over the past week though. Again, markets are being driven by sentiment and narratives — and these have changed since 27 October. In the last five trading days, the S&P 500 has leapt by 5.9%, more than halving its loss since the end of July.
However, the UK’s leading FTSE 100 index climbed just 1.7% that week, leaving it 7.8% below the record high reached on 16 February. So UK shares continue to lag behind US stocks — a recurring theme since the global financial crisis of 2007-09.
No crash in 2023?
Having invested in stocks and shares since 1986/87, I’ve followed capital markets for 37 years. And I’m not expecting a stock-market crash any time soon. Then again, the market might prove me wrong — I still clearly remember the sudden market collapse five years ago, in the final quarter of 2018.
That said, it’s entirely possible that stock prices could plunge during 2024. For example, if the Federal Reserve can’t get US inflation under control, interest rates might have to stay ‘higher for longer’ — bad news for stocks.
Also, the US economy grew by a very strong annualised rate of 4.9% in the third quarter. I sincerely doubt this momentum will continue, given growing stresses on disposable incomes.
Likewise, if higher interest rates hammer US property, then transactions, values and sentiment may plunge, pushing the economy closer towards recession. For me, this is one of the biggest threats to the hoped-for ‘soft landing’.
Summing up, I don’t expect a crash in the coming months. But risks remain for a recession/downturn in 2024!
