What does 2023 hold for stock markets?

From the ongoing impact of the pandemic to the war in Ukraine, it has been a difficult couple of years for investors and stock markets.

But with some signs that inflation is tapering off, is there reason to be optimistic for the future of stock markets?

We take a closer look at what 2023 could have in store. 

The bigger picture 

Stock markets are heading into 2023 off the back of a challenging year. Rapid rises in inflation and interest rates have drained global markets of billions of pounds’ worth of value, as people adjust their financial goals to focus on saving rather than investing.  

In one high-profile example, despite being some of the best performing stocks to buy over the last 20 years, the traditional big US tech companies, such as Netflix, Microsoft, Amazon, Meta and Alphabet had as much as $3.3 trillion of value wiped out over the year.

As a result, within these companies and their larger industries, thousands of jobs have since been lost.    

As a result of the significant selloff of stocks and shares, major stock exchanges, such as the FTSE 250 and New York Stock Exchange, have also recorded significant losses. In total, global stocks lost around a fifth of their value, making it the biggest stock market decline since the 2008 financial crisis.

So after a difficult year, are there signs of optimism for 2023? 

Inflation predictions for 2023 

Although a number of reasons may have contributed, one of the major shocks to the global economy in 2022 was the rapid rise in inflation, which in turn led to rises in interest rates.

As interest rates rose, loans and mortgages became more expensive and households cut back on their spending. As a result, the global economy slowed as people bought less.  

If high interest rates continue long enough though, they could trigger a recession. But without signs of decreasing inflation, central banks are weighing up whether they could and should trigger a recession or continue to battle inflation.

In short, until inflation starts to slow, there will be little room for any kind of economic recovery. 

But there may be positive news ahead. In the US, the Consumer Price Index (CPI) has been decreasing since May, and is now at 7.1 per cent, down from 9.1 per cent in the summer.

There are green shoots in the UK too, with inflation now being measured at 10.5 per cent in December, down from 11.1 per cent in October. 

Even though inflation is slowing, these figures do still mean that prices are increasing, so there’s little hope for any quick economic recovery in the first few months of 2023.

By the end of the year though, the Bank of England estimates that inflation could be between 5 and 6 per cent, before dropping to around 2 per cent in March 2024.  

How will the stock market fare in 2023? 

2023 could be a year of two halves; the first half of the year will likely be a continuation of the difficulties of 2022, but the second half of the year holds more promise.

Against this backdrop, what can we expect of stock markets in 2023, and what does it mean for your clients’ money?  

How will the FTSE perform in 2023? 

The two most popular stock markets in the UK are the FTSE 100, which lists some of the biggest companies in the world, and the FTSE 250, which lists more medium-sized firms and is believed to be more closely related to economic performance.

Despite a volatile year, the FTSE 100 ended 2022 just under one per cent higher than at the start of the year, largely due to the defence and mining sectors. On the other hand, the FTSE 250 ended the year down 19.7 per cent, meaning that both major stock exchanges start 2023 in very different places.  

These trends will likely continue through the start of the year. In the latter months, there may be more room for optimism, however, a year of average returns and moderate performance is most likely.

If your clients have invested in the FTSE markets, ensure they pay close attention to the changing economic landscape, as the large disparity in performance between the two exchanges could change.   

How will the New York Stock Exchange perform in 2023? 

With many of the world’s biggest tech companies listed on the NYSE, it’s no surprise US stock markets performed badly in 2022.

Just like other stock exchanges in the US, such as the Nasdaq Composite, S&P 500 and Russell 2000, which all fell more than 19 per cent over the year, the NYSE recorded a fall of around eight per cent.  

So, what will the year ahead hold? As a recession in the US remains a possibility, US stock exchanges may continue to struggle at the start of 2023.

And for this reason, some banks and analysts are forecasting stock exchanges to continue to lose value in the first half of the year. As the year goes on however, there could be better news and markets could regain some of their lost value.  

As many of the world’s biggest tech companies are listed on American exchanges, it’s entirely possible that a more amenable economic environment could benefit these large tech firms and lead a wider recovery in other US exchanges. 

How will the Shanghai Stock Exchange perform in 2023? 

The Shanghai Stock Exchange recorded its worst annual performance since 2008, as the Chinese economy struggled with virus restrictions and an ongoing financial crisis.

By the end of the year, the stock exchange was down 23 per cent, behind the typical Asian benchmark.  

However, the Chinese government has since changed its stance on Covid restrictions, giving rise to hopes of better performance in 2023.

A lot of uncertainty remains over the Chinese economy though. The stock exchange will likely see a boost towards the end of the year, but there are question marks over how big this recovery may be.  

How will the Nikkei perform in 2023? 

The Japanese stock market wasn’t as heavily impacted by the inflation surge of 2022 as other stock markets, and was a strong performer during the pandemic.

Although the Nikkei ended 2022 lower than at the start of the year, it didn’t perform as badly as others.  

For the year ahead, the Nikkei is expected to perform in a similar manner to other markets, with the first months of 2023 to be modest and stable.

But, as the year progresses, the Nikkei could post a strong recovery as its economy recovers. 

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