As we race towards 2024, more and more clients are asking me: where is the economy headed, and what can we expect to see in the stock market? Of course, I think everyone knows that even those who watch and study the economy can’t predict the future. However, I think my clients are seeking assurance, as are many of us.
The stock market took a dive in 2022, and while 2023 saw some stocks and sectors rally, the market as a whole was largely volatile and inconsistent. The Fed’s continued rate hikes were hard to stomach, and many fear the hikes will lead to a recession. With pessimism and anxiety in the air, the stock market has struggled to maintain stable upward motion.
Some analysts and investors did breathe a sigh of release when October’s inflation date was released. The inflation rate dropped to 3.2%, suggesting the Fed may choose to end rate hikes and begin lowering interest rates in 2024. This move would offer some expansion to an increasingly-tightened economy.
At the same time, other leading indicators were less optimistic. Leading indicators can point to where the economy is headed. October’s leading indicators continue to suggest that the economy is contracting. Companies and consumers have less money to spend as borrowing continues to become more expensive. Supply chains remain constricted, and financial anxiety looms large in many people’s minds.,
Yet no matter how much you or I pour over the above data, we will not be able to predict the direction of the economy. We cannot know what tomorrow or next month or next year will bring. Instead, I urge you to focus on facts and tangible opportunities instead of being caught up in the fearmongering.
- Another person’s anxiety sell can be your discount buy. Volatile markets and other factors can prompt investors to impulsively sell their holdings, focusing more on feelings than on tangible facts. Many stocks face price dips because traders over-sell in response to temporary issues. Finding companies that are otherwise financially healthy but are simply suffering under stock market pessimism can allow you to buy a discounted stock with strong prospects.
- Focus on fact over feeling. Studies have shown that, in the long run, stocks tend to perform in-line with their underlying company’s actual financial value. While political events and other crises may impact a stock’s price in the short-term, only events that directly impact a company’s financial well-being are likely to impact the stock’s performance in the long-run. Make sure to pay close attention to a company’s ability to generate a profit and manage expenses, instead of a company stock’s response to the most recent news cycle.
- Expand your understanding of risk. Most understand risk as taking on too much volatility within a portfolio in the pursuit of growth. While doing so can certainly expose you to a number of risks, risk can also include opting for so much safety that your money doesn’t outpace inflation or your spending habits. Some nervous savers will keep a substantial portion of their savings in cash, earning a very small interest rate. Bank savings account interest rates rarely keep pace with inflation or with retirement withdrawal rates. As a result, folks may end up in a bind when their money is being spent faster than it is growing. It is important to find the right balance of risk by accounting for both stock market volatility and the cost of living
- Diversify. Diversify. Diversify. Diversification is the best strategy for managing risk and volatility. You are offering your portfolio padding, such that if one segment is declining, hopefully another will remain stable or even grow. Historically, many investors have used mutual funds for diversification purposes. However, exchange-traded funds can offer the same diversification benefits with a lower fee structure. Mutual funds are actively managed by an investment advisor who must be compensated for their services. The holders of those mutual funds pay that investor’s compensation. Comparatively, exchange-traded funds are passively managed, meaning most are designing to track an index. Without an investment advisor, surplus fees are not passed down to investors in exchange-traded funds.
- Look at the whole picture. Growth and performance are both important measures of a portfolio’s success. However, there are many other factors to consider, including the dividend yield of the portfolio. The higher the yield, the greater the dividend income. Dividend income is rarely impacted by stock market volatility, and as a result, focusing on dividend income could allow an investor to feel some stability when the market gets rocky.
If you have any questions about the market or the economy, do not hesitate to contact the professionals at Elm3 Financial Group.