As we start the last three months of the year, geopolitical tensions, changes to inflation, and discussions about a recession have some Americans wondering if investing in equities is still wise.
How can we navigate Q4 amidst the current rhetoric without jeopardizing our long-term goals?
This week, we’re diving into what you need to know about investing this quarter, including how to view economic data, whether or not to invest in bonds, and the most important reminder for investors.
Is Economics Like Physics?
As economists predict the future, make estimates, and give a broad range of possible outcomes, it’s helpful to consider this information in its proper context and understand why economists do what they do.
After the Great Depression, fiscal policymakers wanted more robust data to make decisions. This new approach forced economists to treat their field like physics.
However, economics is not a defined art and cannot be reduced to the straightforward math and outcomes of physics.
Instead, economists often make educated guesses (sometimes shaky ones due to the economic data disconnect), so it’s wise not to elevate their assumptions as fact.
Instead, as we make investment decisions, we should step back from the rhetoric and consider the fundamentals, such as consumers, earnings data, and overall trends.
Does Investing in Equities Still Make Sense?
Current earnings data looks substantial relative to the previous quarter. It’s robust and on track. The consumer, too, is fairly healthy. The labor market has softened, but it still looks strong enough in a historical context to sustain economic activity.
These metrics won’t continue perpetually. Yet, when we assess the whole picture, investing in equities still makes sense relative to the market’s perception that investors should be overweight in fixed income because of disinflation.
Bonds will likely make money as rates come down, but it’s important not to overdo that fixed-income exposure. Not only may inflation continue, but we will likely never see 2% inflation again on a perpetual basis. Instead, the new normal will likely be closer to a 2.5-3.5% range.
A portfolio managed appropriately across equities and bonds on a long-term basis creates the best opportunity for long-term success.
Staying Invested
Because of geopolitics and other noise, some investors feel inclined to leave the market or get ahead of volatility. The reality is that you can always find a supposed reason to exit the equity market, whether it’s war, an election, or another unknown.
However, what matters is maintaining a long-term adherence to your financial plan with an objective, structured equity market participation strategy. Our clients are invested in this way, but the key is to stay the course.
No one has a crystal ball. The best we can do is use the right data to guide us. If history is any indicator, the most necessary reminder this quarter is to remain objectively invested, follow a financial plan, and ignore the noise.
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