Your 401(k) just got a big boost
Encouraging economic signs mean more money
Congratulate yourself, America. All you happy and healthy consumers are driving growth and doing a bang-up job. With unemployment at a five-decade low and consumer confidence on the rise again (nearing its 10-year high), the economy can expect a healthy boost for a little longer.
And when the economy is strong, the stock market usually remains robust.
The calculus behind this optimism is not that difficult: When more people are employed, they spend more money. Since consumer spending makes up two-thirds of U.S. GDP and – get this – 17% of global GDP, consumer confidence and consumer spending matter a great deal.
And consumers had multiple jolts of good news about employment Friday, starting with a robust headline number for November's non-farm payrolls report (which logged in at 266,000 new jobs, compared with expectations of 180,000) and continuing with an upward revision to both the September and October reports totaling an additional 41,000 new jobs. Also, the prime-age labor force participation rate remained at 82.8% – another 10-year high: Women are working, minorities are working, disabled
workers are entering the workforce at a rapid pace and individuals with less than a high school education have hit their lowest unemployment rate in twenty-five years.
This is a welcome boost. Consumer sentiment had dipped during the summer as investors worried about a potential risk of recession. Once investors understood recession was not imminent, the market rose and so did the sunny disposition of the U.S. consumer, reaching bullish levels once again.
While trends in employment and spending are beginning to slow modestly, it is important to remember interest rates are back down to historically low levels, housing affordability is improving, inflation remains tame, oil prices are muted and many families are taking home more of their paycheck thanks to the Tax Cut and Jobs Act of 2017. All of this and a strong jobs market are likely to keep the Fed at bay for the near-term. That is good for the economy and good for stocks.
Here are three tips for managing your 401(k) investments:
Don't panic
Don’t let yourself get scared out of stocks by remembering last year’s fourth-quarter rout (thanks again to the Fed – this time raising rates too quickly). Once the Fed began easing rates in 2019, investors cheered, and stocks have risen 26% (including dividends) through Friday. Assess your investment time horizon. When stocks do correct, consider adding to your holdings.
Understand your risk
Understand where you are taking risk. Bond yields are at historically low levels and have been in a 35-year bull market. Are they less risky than stocks? It depends on things like your age and years to retirement along with your risk tolerance, but you should be thinking about your allocation to bonds in the context of your goals. Year-end is a good time to reassess.
Understand what you own
Emerging markets and small-cap stocks can super-charge your portfolio return but can also be risky. Be prepared for that volatility. Consider the investment on its merits. Now is the time to take a look at your allocation.
There is no need to micromanage your 401(k) but the end of the year is a good time to trim some of your winners and potentially add to your losers. It is just a good market calculus.