2022 has been another eventful year for the ASX share market. Is 2023 going to calm down or is there further volatility ahead with another stock market crash?
It's been a difficult time for ASX growth shares such as Xero Limited (ASX: XRO).
Investors have discounted how much they are willing to pay for businesses with long-term growth plans.
But, after such a difficult time, the S&P/ASX 200 Index (ASX: XJO) is up around 10% over the last three months.
No one knows what's going to happen next, so it may pay off for investors to remain positive over the long term. But, in the short term, there could be catalysts for more rollercoaster action for the share market.
Why the ASX stock market could have a rough year
Inflation stronger than expected – For some time the central bankers weren't worried about inflation, underestimating how strongly it was going to become and how long it was going to stick around.
If inflation remains elevated for longer than investors are expecting, then the share market may fall.
Keep at it until the job is done – The boss of the US central bank, the Federal Reserve, has committed to keep doing what's necessary to put a lid on inflation.
Jerome Powell said that the US Federal Reserve's monetary policy choices are building on what happened in the 1970s and 1980s. One of the lessons was that central banks "can" and "should" take responsibility for delivering "low and stable inflation". Powell said that the central bank "must keep at it until the job is done" because "history shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting". He referred to the fact that a lengthy period of very restrictive monetary policy was needed to stem high inflation.
The higher interest rate for longer could hurt asset prices in 2023, particularly if some investors have been hoping for the US Federal Reserve to be softer next year.
A global recession – Interest rates can have a big impact on valuations. However, don't forget that profitability may be the most important factor. If interest rate costs and higher-priced goods and services hit households and businesses too hard, it could tip the global economy into recession. This may be painful in terms of hitting profits, and then hurt share prices on the ASX stock market.
There may not be another crash
Volatility is fairly likely, it happens all the time. But, it's not certain that investors will see a substantial fall for a few different reasons.
There already has been a fall – I think the starting point for valuations will have a big impact on whether there is a crash. If something starts at $100 and goes up to $130, but then goes back to $100 it would count as a significant fall. But if it just stayed at $100 the whole time, it wouldn't count as a crash even though it ended at the same price. If valuations stay at this depressed level, there is less likely to be a heavy fall.
The S&P 500 Index (INDEXSP: .INX) is down 20% in 2022 and it's down 5% since 1 December 2022. It's possible the ASX stock market could rise and then fall back. But it's also possible that we have seen the lowest point of this share market decline already, earlier in 2022.
'Priced in'? – There may be more negative impacts on the economy in 2023, such as an even higher interest rate and lower profits. But, investors are usually forward-looking with how valuations work. The market may take future bad news in its stride because investors are already expecting it.
Some investors want to be positive – I think that the market is looking for reasons to go higher, which could be why the ASX 200 has risen by around 10% over the last three months. Bears may have their day again in 2023, but if investors focus on the positives and the long-term outlook (including the COVID reopening of China), then the optimistic investors could benefit by ignoring some of the noise.
Don't forget that the ASX is dominated by miners and banking shares. Miners could benefit from strengthening commodity prices, while ASX bank share profitability could increase during 2023 with higher interest rates (in the short term at least).
