Retail investors have chased stocks much higher so far in 2023. Much of the enthusiasm due to the upcoming “Fed pivot.” And as a result, no long and prolonged recession.
The Fed pivot takes place only when inflation stalls. The goes down. And the Federal Reserve begins to lower interest rates.
My guess is as good as yours. And not any better than many economic and stock market experts. So please read this disclosure with caution.
In my 39 years as an investment advisor, I have never made any more for my clients on “what might happen.” With the economy, stock market, Federal Reserve, or company earnings.
You can understand my caution.
What if the Fed does not cut interest rates?
What is the economy does dip into recession?
What if there is more pressure on company earnings?
What if store closing and layoffs continue?
I talk to individual 401(k) every day. Many of them, through my prospecting efforts. These investors don’t know me. Even more important, they have never invested their 401(k) accounts in bad stock markets.
The previous fact confirms the fact that “I am getting old.” But that topic is for another blog post.
Many 401(k) investors have never seen an historic stock market decline. Like the historic rise in interest rates over the last couple of years.
It is one thing when the bond mutual funds go down in value on a default 401(k) menu. The real 401(k) investor pain comes when all the stock mutual funds go down in value. All at the same time.
The last few years of stock market gains have come from zero interest rates. Supported by trillions of corporate share buybacks.
Can you continue to count of your 401(k) account value to go up every year?
Yes, from your personal and company-matching contributions. I would take issue if you could count on lower interest rates. Improved company earnings. And higher stock prices.
It all comes down to supply and demand. The main economic force to grow the value of your 401(k) account.
Higher interest rates raise the price of money. For individual and corporations. Lately, higher interest rates have led to much higher inflation.
The Federal Reserve is no longer going to continue to stimulate the economy. Or the stock and bond markets. Low-interest rates, low-inflation, and reasonable economic growth. All gone for now. Or going for now.
There is a very real chance that stock and bond market investment returns will be hard to find. For at least the next few years.
There are 401(k) money market accounts now paying 4%. In a regular 401(k) account. Available in a self-directed brokerage account 401(k) option.
Owing the wrong 401(k) mutual funds now is risky. More than it has ever been over the last few years. Especially when you can get a guaranteed rate of return for “doing nothing.”
The stock market is highly valued at current levels. Interest rates are not going down any time soon. Lower investment returns for your 401(k) are not hard to imagine.
Concerned about your current 401(k) mutual funds? Comment below. Let’s start a conversation. Don’t be surprised if stocks fall more. And interest rates remain at their current levels longer than expected.
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