5 Reasons For 401(k) Participants to Be Thankful

5 Reasons For 401(k) Participants to Be Thankful

Although the past year has seen a tumultuous economy and stock market, there are still reasons for retirement savers to be thankful. Read below to learn about five ways economic and market conditions appear more favorable for better returns in the year ahead.

#1: Lower Stock Valuations

Metrics such as the price-to-earnings (P/E) ratio are often used as a quick gauge of how “expensive” a particular stock is compared to its peers and history. As a result of the sharp drawdown in the market during 2022, many stocks are now trading at some of the “cheapest” levels seen in years. This potentially creates a great, discounted starting point for any new money invested in the market, something which 401(k) participants get to take advantage of through their regular plan contributions.

#2: Higher Bond Yields

A well-diversified portfolio doesn’t just mean having an adequate mix of equities, but exposure to other asset classes as well, the most popular of which being fixed income. Indeed, bonds often play a major role in a properly structured retirement portfolio, and their importance increases as one ages. This has been a terrible year for bond valuations, but this is a result of the inverse relationship between bond price and yield. With bonds now providing much more attractive interest rates, retirees will have an easier time supplementing their income in their golden years while still reducing overall risk. Younger investors can benefit too down the road as inflation pressures start to reverse, and the inverse relationship between bond price and yield works the other way in their favor.

#3: Bullish Seasonal Tailwinds

Although past performance is no guarantee of future market returns, we are now entering the holiday season, which has historically been one of the most favorable periods of the year for equities in terms of both price appreciation and relative volatility. On top of this, we just had the midterm elections across the country, and the 12 months following this tend to be the best part of the 4-year Presidential cycle for stocks over the years. A handful of recent constructive developments in the economy, and in turn, future monetary policy may further add to the positive market momentum. It is of course worth noting, though, that stocks have already rallied significantly over the past month, which could impact the timing and trajectory of equities in the near-term.

#4: A Healthy Job Market for Most Americans

Outside of giant consumer tech companies, most employers are not only still hiring, but also continuing to raise worker compensation and remaining reluctant to let go of the employees they currently have. This favorable job market for the vast majority of Americans means that more people are likely able to work for a company that provides access to a 401(k)-retirement plan, through which regular contributions can enable participants to capitalize on this year’s market correction. Such efforts can be enhanced by taking full advantage of an employer’s matching contributions and periodically increasing the amount of money regularly set aside from each paycheck.

#5: Falling Inflation

A wide array of incoming economic data continues to suggest that inflation in America has generally peaked. This doesn’t mean that inflation can’t continue to get worse in some areas, or that many prices are not still uncomfortably high for many households, but “less bad” is a big improvement from “worst ever,” and an important first step towards more normal, livable costs for many popular consumer goods and services. Entering a disinflationary environment will also make it easier for the Federal Reserve to achieve its policy objectives, while also leaving it better equipped to handle another economic shock down the road.

The Bottom Line

The future is never certain, but both economic and market conditions appear more favorable for better returns in the year ahead, which is something to be thankful for after what has been a historically difficult 2022 for many investors.

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