Everyone who's been watching the ASX stock market over the past few weeks would have noticed the proverbial cliff that the S&P/ASX 200 Index (ASX: XJO) and ASX shares have seemingly jumped off. But are we heading for a stock market correction or crash?
Back at the start of September, the ASX 200 was sitting comfortably above 7,400 points and only a few strong days away from hitting its all-time high.
But as it stands today, the ASX 200 is back under 7,000 points and looking like it is in danger of breaching 6,900 points. This comes after the index has retreated by almost 2% since the start of October alone. Today, we are sitting at a six-month low for ASX 200 shares.
So how likely is a stock market crash before the end of 2023?
Is an ASX stock market crash coming in 2023?
Well, to get this out of the way, no one knows whether a crash will happen or not until it actually happens. There have been plenty of times throughout history when investors were expecting a market crash, and it didn't end up happening. The opposite is also true though. Market crashes have also occurred unexpectedly and without warning, most infamously in the 1987 stock market crash.
A general guide for the health of the markets is the health of the economy. Investor confidence is typically at its peak when the economy is in rude health and humming along nicely. Conversely, a wobbly economy can cause investor uncertainty and fear, and raise the prospects of a future market crash.
The latter is arguably why the markets have been so shaky over the past few weeks. It seems that the stars are aligning for a global recession, or at least a pullback in economic growth. We have rising oil prices (although these have come off the boil in recent days). Rising oil lifts inflation, which in turn might result in higher interest rates (and bond yields) than what investors were expecting just a few weeks ago.
Almost without fail, past recessions have started during times when interest rates have been at historically high levels. As they are right now. And if the global economy does top into a recession, there's a good chance that the markets will get a lot worse before they get better.
How to prepare for the worst
Regardless of whether a stock market crash is coming in 2023 or not, I think it's prudent that investors start mentally and financially preparing for one. While we don't know when the next crash could be, we do know that there will eventually be one.
So take a look through your portfolio today. Are there any companies that you don't have full conviction in? We all buy our shares for a reason. Sometimes we get it wrong, and selling an investment is necessary. But the absolute worst time to sell out of your shares is during a market crash. This is to be avoided at all costs if you are to be a successful investor.
I think it's a good idea for all investors to imagine a market crash, and think about how you will feel (and react) if your own portfolio of ASX shares falls another 10%, 15% or even 30%. As they say, stock market crashes are temporary, but selling is forever. And the best investors are usually buying shares when everyone else is selling them.
