As the holidays approach, it's a good time to think about the positive things happening in both our personal lives and our investments. Investors often worry about what might go wrong instead of recognizing what has gone well. Right now, with markets doing well, looking back at the past year can help provide useful perspective as we face new situations ahead.
Financial markets have delivered good returns over time, and this year has been strong too. The S&P 500 (a collection of 500 large U.S. companies) has gained over 15% including dividends so far this year. Bonds (which are loans you make to companies or governments) have returned about 7% as measured by the Bloomberg U.S. Aggregate Bond Index. For the first time in many years, international stocks have performed better than U.S. stocks. Many portfolios that hold different types of investments have benefited from these positive results. What should investors think about as they look toward next year?
While what happened in the past doesn't tell us what will happen in the future, history shows us that rising markets usually last much longer than falling markets—often between five and ten years or more. The typical rising market has delivered much larger total returns than what we've seen so far in this current period, even though investors faced many difficulties during those times. While there are real concerns about how expensive stocks are and how much of the market's gains come from just a few large companies, long-term investing means staying invested through all kinds of market conditions.
The positive returns from bonds are worth noting after the difficult period of rising interest rates and inflation in recent years. As rates have stabilized and the Federal Reserve (the central bank that manages U.S. monetary policy) has started lowering rates again, bond prices have gone up. This shows why holding both stocks and bonds remains important for creating balanced portfolios that generate income.
This strength highlights an important idea: trying to predict short-term market movements is not only hard, but can work against you if it's not part of your overall financial plan. This was clear even in April when markets fell sharply after new tariffs were announced. Markets not only bounced back quickly, but reached new record highs. Investors who stayed invested were rewarded, while those who sold based on news headlines may have missed gains and might still be waiting to get back in.
Prices have risen about 3% over the past year, which continues to be difficult for families and policymakers. However, from an investment perspective, inflation has been much more stable, and there are fewer worries about rapidly rising prices compared to earlier years.
This has allowed the Federal Reserve to begin lowering interest rates after keeping them high for most of the year. The Fed is also doing this to support the job market, which has been getting weaker since summer. Historically, lower rates help both stocks and bonds by making it cheaper for businesses and consumers to borrow money, while also making existing bonds with higher interest payments more valuable. So, even though inflation and interest rates will remain important for markets, fears of constantly rising inflation and interest rates seem to be in the past.
The year ahead will likely bring new uncertainties just like every year does. When this happens, there will naturally be concerns about economic downturns, falling markets, and whether the good times are ending. Rather than reacting to every market event, long-term investors can instead hold an appropriate mix of investments that can handle different market and economic situations.
We can also be grateful that we have different types of investments available to help balance risk and potential returns. Managing risk is important at all times, and especially after three years of rising markets. The S&P 500 price-to-earnings ratio (a measure of how expensive stocks are) of 22.6x is above average and getting closer to the high levels seen during the dot-com boom.
How expensive stocks are doesn't predict what the market will do in the short term, so this doesn't mean markets can't keep doing well. However, it does suggest that future returns might be lower, especially when compared with cheaper investments in other areas and sectors. Therefore, it's important to have realistic expectations and to own different parts of the market that have more attractive prices.
Questions about artificial intelligence will continue. It's natural that the impact on stock prices is hard to predict given how much this technology could change things. This is similar to the difficulty of predicting how the internet revolution would play out starting in the mid-1990s. Political uncertainty is also likely to continue with ongoing tariff changes, global tensions, the growing national debt, and more. Recent experience shows us that overreacting to these events is not only unhelpful, but can throw financial plans off track.
8269264.1