This Year, Investors Have Three Things To Be Thankful For.
The year 2022 was a big one for the financial markets and a tough one for investors. With inflation rising at the fastest rate in over 40 years, stocks and bonds fell into bear markets and lost some significant gains made during the pandemic recovery. As we get closer to the end of the year, the Fed is raising interest rates quickly, the war in Ukraine is still going on, and many economies worldwide may already be in a recession. What could investors be thankful for in this kind of environment?
Over the past century, the stock market has endured countless crises
Investing is often as much about how people think as it is about numbers. Even though many investors know that staying invested is the best way to make money in the long run, it can be hard to do so at all times of the market cycle. We pay attention to bad headlines and bad economic news, but positive trends can be slow and sometimes even hard to see. Even though there are a lot of unknowns, the holidays are a great time for investors to remember that there is still a lot to be thankful for. This is especially true since the market has been going up in the last few weeks. This is because of a few things.
First, the fact that there are risks for investors to navigate is not only normal, but is always the case. The truth is that there are always reasons to be concerned when it comes to the economy and world events. Investors often refer to this as the "wall of worry" - a concept that is not dissimilar to the 5 stages of grief.
When a market-moving event occurs, whether it's economic, financial or geopolitical, markets often go through the phases of denial, anger, bargaining, and depression. Eventually, markets enter the acceptance phase either because the situation can be resolved or because prices can adjust accordingly. Regardless of the circumstances, markets tend to move forward once it enters this phase.
So, although the stock market tends to rise over long timeframes, there has never been a period during which investors were perfectly content. In fact, the reason that investors earn positive returns is exactly because they are willing to stay invested during periods of market grief, knowing that eventually there will be acceptance. Thus, it is not just a nice coincidence that investors who stay diversified through thick and thin tend to do well - it is a direct consequence of market psychology.
The job market is exceptionally strong
Second, investors and consumers can be thankful that, despite the economic doom-and-gloom, the job market is still strong - perhaps surprisingly so. The unemployment rate is only 3.7%, a sharp decline from the peak of 14.7% in 2020, and near the pre-pandemic low of 3.5%. Over the past year, the economy has added an average of 442,000 jobs per month, well above the pre-pandemic average of under 200,000 per month since the global financial crisis. There are still 10.7 million job openings compared to 6.1 million unemployed individuals, although some sectors such as tech are now experiencing layoffs. Wages are still rising at an average pace of 5.5% per year which, although slower than inflation, is still very welcome after a decade of stagnation.
What the labor market does from here as the Fed raises rates is an open question. So far, rapid rate increases have done little to stop hiring activity and wage gains. While this is bad from an inflation perspective, it can be positive for consumers. If inflation does begin to decline steadily, as it did in the latest Consumer Price Index report, then households could be in a strong position when economic activity recovers.
Rising bond yields make it easier to generate portfolio income
Third, investors can be thankful that it's easier to generate income from their portfolios than at any point since the global financial crisis. This is especially important for those in or near retirement. For years, investors were forced to "reach for yield" - i.e., to take more risk than they would otherwise like to in order to generate income via riskier bonds, dividend-paying stocks, or even more extreme measures such as crypto lending. So, while bond prices have struggled this year as interest rates have jumped, the silver lining is that yields are now higher across many types of bonds.
Unfortunately, while the yields on savings accounts are also creeping higher, the value of cash is directly eroded by inflation. Thus, while it may be tempting to hide in cash while markets stabilize, inflation makes this approach unattractive. In addition, it is still the case that markets can turn around and recover when investors least expect it, as it has demonstrated throughout the year. Trying to time the market is not only difficult, but it may be impossible, especially when many investors are only focused on negative headlines.