Will Australia go into a Recession in 2023?

Today I was reminded about investor psychology and the old saying that if you follow the masses, you’re probably going in the wrong direction. Everyone seems to be talking about a world recession in 2023, with some arguing that the US is already in recession and that Europe and the rest of world will follow. But is this really bad for the stock market?

Has the stock market already factored in a recession?

The answer may surprise you because it is contrary to what the masses are spruiking, particularly as recessions are generally good for the stock market. A recession is categorised as two negative quarters of GDP and Australia has experienced a technical recession in 2000, 2006, 2018 and 2020. Each time the market had a short dip before rising strongly. The recession in 2020 was a little different, as it was event driven due to the COVID-19 pandemic, which saw the world quickly shut down while the other recessions simply slowed the economy.

The question right now is if Australia does go into a recession in 2023 will the stock market dip again. I believe this is unlikely, as the market is indicating that it will rise in 2023. The COVID recession was a little over two years ago and unlike what occurred after previous recessions, our market has not been overly bullish. Given what has unfolded in the last two years including the increasing inflation and rising interest rates, I believe the market has already factored in a recession.

In essence, if everyone is thinking the market will fall and has already factored in the worst, then moving forward the market must rise. The contrarian view that Buffett talks about rings true right now because if everyone is afraid of the stock market, this spells opportunity for those who remain unemotional and patient.

What were the best and worst performing sectors last week?

The best performing sectors included Utilities up 5.04 per cent followed by Industrials up 2.44 per cent and Financials up 2.05 per cent. The worst performing sectors included Information Technology up 0.14 per cent followed by Materials up 0.47 per cent and Energy up 0.90 per cent.

The best performers in the S&P/ASX top 100 stocks included Virgin Money up 23.81 per cent followed by Whitehaven Coal up 10.74 per cent and AGL Energy up 7.41 per cent. The worst performing stocks included the Star Entertainment Group down 6.85 per cent followed by Block down 6.49 per cent and Pilbara Minerals down 6.30 per cent.

What's next for the Australian stock market?

What an interesting week it was given that the market fell away on Monday and looked like it would fall further to confirm our first down week in over a month but instead it turned on Tuesday to rise nicely over the remainder of the week. It is now seven weeks since the low on 3 October with the previous Bull Run on the Australian market lasting eight weeks between June and August.

While we would all like the market to just keep rising, we know it doesn’t work like that and we need to be prepared for a turning point in the current uptrend. It’s not a matter of if it will fall, just when and it is likely to be very soon. As I have stated previously, I expect the fall to last for one or two weeks with strong support between 7,000 and 7,200 points likely to stop the fall.

Now is not the time to buy into lots of new positions, rather it is about being selective, as I believe better buying opportunities will occur in the not too distant future.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.