The S&P/ASX 200 Index (ASX: XJO) share market is facing an uncertain time for the rest of 2023.
While the market fell in 2022, it essentially recovered all of that lost ground in January 2023 after gaining 6%.
But, since early February, ASX 200 shares have been drifting lower.
Let's look at some of the opposing thoughts on the situation.
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Optimistic case for ASX 200 shares
I think that when the market becomes scared, the sell-off usually happens when uncertainty is at its highest. By uncertainty, I don't mean how bad things are, I mean when it's not clear how bad things will become.
For example, the worst of the COVID-19 crash was in March 2020, even though deaths and lockdowns persisted for a long time after that.
Last year, the ASX 200 hit lows in June 2022 and at the end of September 2022. But, even though interest rates are much higher than in June and September, the share market has recovered. Investors have already gotten used to the high inflation story and are now focusing on the recovery.
Over time, many ASX 200 shares have shown they can grow profit to new records, which makes me believe plenty of them can grow profit into the future. This thought can help investors remain positive.
Investing is a long-term endeavour, so the short term isn't that important. But businesses like Wesfarmers Ltd (ASX: WES) and JB Hi-Fi Limited (ASX: JBH) are still reporting sales growth in January 2023. The Commonwealth Bank of Australia (ASX: CBA) result also showed another increase in net profit after tax (NPAT) thanks to stronger lending profits.
With the ASX 200 being weighted to banks like CBA and resource businesses like BHP Group Ltd (ASX: BHP), the index could be protected in 2023 by the banks' higher lending profits and strong resource prices (thanks to Chinese demand).
Bearish case
On the other hand, there's no guarantee that the ASX 200 will continue to perform.
On the resource side of things, China is reportedly not seeing a major upswing with its economy (yet), despite ending lockdowns. CNBC reported that there has been a "sharp drop in loans to households" year over year. The chief China economist of financial group Nomura, Ting Lu, said: "The mixed data send a clear message that markets should not be too bullish about growth this year."
With how important mortgage demand is for the construction sector in China, which uses a lot of steel/iron, it could imply that the iron ore price has risen too far.
Another negative factor could be that interest rates could continue to rise, further than some ASX 200 share investors are expecting.
The Australian Financial Review reported on Reserve Bank of Australia (RBA) governor Philip Lowe's comments to Senate estimates that people on fixed-rate loans who didn't use low rates to build up savings are in for "a lot more difficulty".
In the latest RBA monthly interest rate increase, Dr Lowe said that Australian CPI inflation for the three months to December 2022, in underlying terms, was 6.9%, which was higher than expected. The RBA board expects that "further increases in interest rates will be needed over the months ahead".
In the US, inflation rose in January by 0.5% after a 0.1% increase in December, according to reporting by CNBC. This was also more than expected. The Dallas Fed President Lorie Logan said:
We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions.
Higher interest rates could be bad news for a number of sectors like retailers, property-linked businesses, and so on.
ASX bank shares could also suffer if a lot more households start getting into arrears.
Foolish takeaway
I don't think that the overall ASX 200 share market is going to crash, the worst of the decline may have been seen last year.
However, if some businesses report weaker-than-expected numbers, then this could lead to a plunge in share prices, such as we've seen with Temple & Webster Group Ltd (ASX: TPW) and JB Hi-Fi Limited. But I think that the declines are opening up long-term opportunities.
