It has been a challenging year for many British businesses. Despite that, the FTSE 100 index of leading companies is within 1% of where it started 2022. It has actually increased 5% over the past year against a worsening economic backdrop.
Does that mismatch mean we could be heading for a stock market crash next year – and, if so, how should I position my portfolio now?
A crash is hard to predict
Some stock markets have already tumbled heavily. The US Nasdaq, for example, is down 29% over the past 12 months after constituent shares such as Amazon and Alphabet fell a long way.
But could shares fall further? The answer is yes. Just because shares have fallen a long way does not mean they cannot head further south.
Many tech companies are forecasting reduced earnings, meaning their valuations could look less attractive, unless share prices fall.
Amazon, for example, trades on a price-to-earnings ratio of 86 at the moment. As a long-term investor, I remain upbeat about Amazon’s future. But looking at the numbers alone, I would not be surprised if Amazon fell further from here.
It is not only tech companies that are wobbling. High energy costs, inflation, and weakening consumer demand could also spell trouble for other companies. With problems mounting in many parts of the economy, I would not be surprised to see the stock market falling at some point. That could be a full-blown crash, but it might also be a gentler decline.
Market timing
But while I expect the market to fall at some point, perhaps heavily, I do not know when that will happen. The economy looks bad and that could be a big problem for shares in 2023.
But economic weakness has been evident across all of 2022, so far — and the FTSE 100 has barely budged. If market timing was easy, everyone would do it.
In reality, no matter how confident an investor may be, market timing is never guaranteed to be successful.
Investing for the long term
So what can I do? My approach is to forget trying to time the broad market. Instead, I always look at specific shares. I then consider whether a company I think has a great business is selling at an attractive price. If it is, I would consider buying it for my portfolio.
If the price then fell, so what? If my investment thesis is correct, hopefully over the long term the price would do well. A falling share price only matters if I choose to sell the shares. Otherwise I could sit back and, hopefully, over the years the share price would reflect my positive investment thesis.
So I am not worrying about the possibility of a stock market crash. Instead, I am spending my energies hunting for shares I think could be long-term winners that sell today for a price I am willing to pay.
