If someone asked you today, how do you feel about the economy, what would you say? What about the stock market? If you follow the news, what is your perception of 2023? These questions may feel quite loaded, but they have been on my mind as we approach the end of the year.
According to the preliminary reading of the University of Michigan’s Consumer Sentiment Index (MCSI), U.S. consumer sentiment has fallen for a fourth straight month in November. On the other hand, the latest Consumer Price Index (CPI) report showed inflation was flat in October versus the prior month, and core CPI (a measure that excludes food and energy prices) hit a two-year low. In looking at just these two factors, I wanted to show how these are giving mixed signals.
Ever since the Federal Reserve began its campaign of interest rate increases in March 2022, all eyes have been on the latest news regarding economic indicators and the market’s response to these. Economic indicators help us gauge the health and state of the economy. CPI and Consumer Sentiment, are examples of different types of data: hard and soft. Hard data is something that’s easy to measure, such as increase in prices, unemployment rate, industrial production, etc. Soft data is the opposite, and it is based on surveys and people’s sentiment. So far, hard data has shown a resilient economy; however, when looking at the soft data, you may see a more pessimistic reality. This is the problem with recency bias. As human beings, we tend to project the past (especially the recent past) into the future and when everything is going great, we believe it will continue to be great. When it goes the other way and everything is negative, we believe it will continue to be negative.
Looking back, 2022 was a tough year for investors and financial markets but so far, the story has been different for 2023. Dealing with inflation, the Fed’s hiking cycle, geopolitical risk, a banking crisis, and the rise of artificial intelligence among other things, has vastly influenced this year’s market movements. A quick Google search for “S&P 500 performance year-to-date” last night, shows the index has returned around 18%+ so far this year. I’m not saying this will continue, it might, but nobody knows. Just because one investment cycle was bad, doesn’t mean the next one will be bad too. It also doesn’t mean the next one will be good.
Because of recency bias, investors tend to get out of the market and sell during a downturn and get back in when it’s recovered. The news cycle, the Fed, following economic indicators, that person you follow on Instagram or TikTok, may all tell different stories and may have opinions regarding where the economy is and what you should be doing with your money. Our goal as financial advisors is to help our clients stay the course and remain invested in good markets and bad, as long as their circumstances have not changed drastically, and one of the most powerful tools against all the outside noise is an investment strategy that’s paired with a goal-based financial plan.