As the Stock Market Soars and Recession Fears Recede, What Should You Do With Your Retirement Investments?
Written by
John Csiszar
Edited by
Amber Barkley
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If there’s one thing that’s certain about the stock market, it’s that no one can predict short-term price movements. Many pundits were completely wrong about the market in 2022, when it fell by nearly 20%, and many have been similarly wrong in 2023, as the indexes hit all-time highs. The bottom line is that investors in general, even professional ones, tend to react emotionally to the market’s most recent actions — and that can cause problems.
For most of 2023, for example, the market has been absolutely booming, with even huge tech stocks like Meta Platforms and Nvidia soaring over 100% and 200%, respectively. But as the calendar has turned to August, stocks have begun slowly trending down, leaving investors to ask the age-old question once again: Where is the market headed for the rest of the year, and what should I do with my retirement portfolio?
Why Did the Markets Take Off in Early 2023?
A growing belief that a recession has been postponed or avoided entirely has been the primary driver behind the market’s rally in 2023. Other factors have also played a role.
For one thing, many stocks got pummeled in 2022, so some of the bounce-back in 2023 has been a relief rally. Excitement over the growing reach of artificial intelligence has also played a role. However, the economy’s resilience in the face of high interest rates and inflation — and the fact that the Fed seems to be close to ending its rate-hike cycle — have provided the main fuel to the market’s fire in 2023.
What’s Going On With the August Selloff?
In spite of economic conditions generally improving, markets have gotten decidedly softer in August 2023. As of Aug. 21, for example, the major market averages were down between 3.5% and 7%.
A number of factors have played into this. First, summer in general tends to bring weaker equity prices, in part because many of the major players are simply on vacation and volumes fall. But some profit taking has also hit the market, for a number of reasons. For one, many big-name stocks in the S&P 500, particularly those in the tech market, have absolutely skyrocketed, making a temporary pullback understandable.
But others may fear that the Fed’s work isn’t yet done, and that interest rates must go higher still. In other words, some traders fear that the market isn’t quite out of the woods yet.
Will There Be a ‘Soft Landing’?
This is the $1 million question. If there is indeed a so-called “soft landing,” in which the economy avoids a recession, that will likely be seen as an “all-clear” signal for the stock market. But raising interest rates to the point of squashing inflation without stifling the economy is a delicate balancing act.
The Fed famously succeeded in 1994 and 1995, but few Federal Reserve Boards have been able to accomplish this feat. So, the answer to this question is unknowable, but the historic odds point towards failure.
How Should You Position Your Portfolio?
If you have a long-term perspective on your investments — meaning you’re not planning to retire in the next few years — you shouldn’t be too concerned with short-term movements. No one can predict with 100% certainty whether or not there will be a recession this year or next year, or even if there will be one at all.
Similarly, no one knows if the Fed will continue to raise interest rates for the rest of 2023 and into 2024, or if their fight against inflation is already over. In short, there is always something for the market to worry about. Even if the Fed engineers a “soft landing,” inflation falls and interest rates follow, there will almost certainly be a new fear entering the markets, whether it’s a spike in oil prices, a rise in geopolitical tensions or simply an earnings shortfall that triggers market declines.
In light of this, it’s always a good idea to continue to stick with your long-term investment plan, whether stocks are up or down. If some of your positions are out of balance due to sharp gains in 2023, there’s nothing wrong with taking some of those profits and reallocating them to underperforming areas of your portfolio — assuming you still believe in their ongoing prospects. Similarly, if you’ve suffered some losses due to the pullback in August 2023, you might consider adding more to your positions.
The important thing is to always keep your portfolio in line with your investment objectives and risk tolerance and to not let emotion pull you away from your long-term financial strategy.
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